The History Of Chinas Growth

Published Date: 02 Nov 2017

INTRODUCTION

1. China’s emergence as a great power ranks as one of the major landmarks of the twentieth century for it marks a qualitative shift in world history from a Eurocentric orientation to definite turn towards the Asia Pacific Rim. China economic spectacle is right in front of the world to see and believe. China in last few decades has risen at an enviable rate of near 10%. Led by Deng Xiaoping, China embarked on a journey of gradual free market reforms in 1978 these initial reforms paved the way for future open market. Capitalist "baby steps" such as farm privatization, legalization of free enterprise and opening up to foreign investment helped China’s economy grow heartily in the 1980s, emboldening the country in its pursuit of further economic liberalization. The early 1990s saw the start of banking reforms and the early development of capital markets, including the opening of the Shanghai and Shenzhen Stock Exchanges.

2. Other catalysts to this growth were the availability of cheap manpower, favourable govt policies, national will and strong subisidies. Having a vast army of highly industrious workers and low wages helped China to become the world’s preeminent manufacturing powerhouse, while pursuing an export-led growth strategy similar to its Asian neighbors. China rapidly urbanized as several hundred million people moved from impoverished farm villages to scores of newly-built cities in pursuit of factory and construction work and better living

standards. The strategy of economic liberalization, modernization and infrastructure development has paid off handsomely with an unprecedented yearly GDP growth rate of 9.5% from 1978 to 2010, helping to lift hundreds of millions of Chinese out of poverty. Though China had already been growing at a high rate for over two decades, it was only in the mid-2000s that it entered the ranks of the world’s largest economies and started generating attention as a potential consumer market, investment destination and emerging superpower. China’s economy leapfrogged past the UK in 2005, Germany in 2009 and Japan in 2010 to become the world’s second largest economy, behind only the U.S.

3. While all the speculations about China’s growing eminence to the world forum continue, there are certain issues which make economists believe that the China’s growth story may fizzle out in near future. The class of scholars who support this theory have gone a step further to suggest a near collapse of the Chinese growth story in coming future.

STATEMENT OF PROBLEM

4. China’s stupendous economic growth has hogged the limelight for years. A near 10% growth rate of Chinese economy has fuelled the aspirations of many. China today is seen as a sole savior of debt ridden European economies. However, all this notwithstanding, this perfect story sometimes becomes too perfect to believe, thus raising doubts about its veracity. The study aims at

analyzing the contours of economic growth of China in order to ascertain whether this growth has any hidden dimensions to it and whether it will be sustained in the future.

HYPOTHESIS

5. The phenomenal economic growth displayed by China in the past few decades is unlikely to be sustained in near future due to aging population, disproportionate growth and corrupt and oppressive political regime.

JUSTIFICATION OF STUDY

6. While everyone talks about the unprecedented rise of Chinese economy, the same seems to be restricted to only Eastern coast. There are wide spread protest against the suppression of minority rights in Xing Ziang & Ughyur provinces of China. There are continuous uprisings against the Chinese oppression in Tibet and within the heartland demands for political reforms have been on rise.

7. China’s economic growth has largely been state sponsored and it seems that most of the times it has been driven by the stimulus provided by the govt. Majority of the companies coming to eminence from China remain Govt owned. The aging populace further aggravates the problem for China.

8. The study hence aims to highlight and bring to fore certain facts that exhibit the problems Chinese growth story.

SCOPE

9. The study will be carried out in the following manner:-

(a) Chapter I - Tracing China’s Economic Miracle.

(b) Chapter II - Demographic Concerns and the Social Conflicts.

(c) Chapter III - Regional Disparity.

(d) Chapter IV - Corruption.

(e) Chapter V - Other Factors that may impede Chinese Growth.

(f) Chapter VI - Conclusion.

CHAPTER II- TRACING CHINA’S ECONOMIC MIRACLE

China Economy Prior to 1978

Prior to 1979, Communist China was following socialistic practices to ensure that all sections of its population grow equivalently. China followed a rather conservative and the economy was largely centrally controlled. A major chunk of the country’s economic product was directly controlled by the state, which spelt out the production goals, regulated the prices and apportioned resources throughout the country. During the 1950s, the land holdings of the private farmers were converted into large state owned communes. To trigger rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978 nearly three-fourths of industrial production was outcome of centrally controlled state owned enterprises (SOEs) according to centrally planned output targets.

Private enterprises and foreign-invested firms were nearly nonexistent. A central goal of the Chinese government was to make China’s economy relatively self-sufficient. Foreign trade was generally limited to obtaining only those goods that could not be made or obtained in China. However the Chinese economy always managed a yearly growth rate of approximately 4% which was not seen in any of the developing economies of the world. Government policies kept the Chinese economy relatively stagnant and inefficient, mainly because there were few profit incentives for firms and farmers; competition was virtually nonexistent, and price and production controls caused widespread distortions in the economy.

Chinese living standards were substantially lower than those of many other developing countries. The Chinese government hoped that gradual reform would significantly increase economic growth and raise living standards.

The Introduction of Economic Reforms

Beginning in 1979, China launched a spate of economic reforms. These reforms were initiated by Deng Xaiopong after China plunged into economic problems due to sluggish economic growth, large scale unemployment, poor infrastructure and high inflationary pressures.

The central government rehashed the price and ownership policy in agriculture sector thus enabling the farmers to sell a portion of their crops in free market. The government also went a step further and established four special economic zones (SEZs) along the coast for the purpose of attracting foreign investment, boosting exports and importing high technology products into China. Additional reforms, which followed in stages, sought to decentralize economic policymaking in several sectors, especially trade. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning. Additional coastal regions and cities were designated as open cities and development zones, which allowed them to experiment with free market reforms and to offer tax and trade incentives to attract foreign investment. In addition, state price controls on a wide range of products were gradually eliminated.

Economic Growth Since Reforms

Chinese income rose modestly but impressively from 1949 to 1978, and rapidly since 1978 (from about US$ 50 per capita to over $1,000 by 2005). Opium addiction was wiped out, starvation was largely eliminated, health conditions have improved, education levels have increased, and since 1978, a 200 plus million person middle class has emerged, mostly in the coastal cities.

Although there has been growing relative inequality, there also has been absolute economic growth for most, and the post-1978 economic successes have pulled 200-300 million poor Chinese peasants out of poverty. China in these years has posted a startling near double digit growth rate. The Chinese economy has been on an upward swing, with no sign of slowing down anytime soon. The economy held together well even during the tumultuous period of the Asian crisis in the late 1990s. China’s average per capita income has gone up 11 times in the past 30 years and it has effectively lifted more than 400 million people out of poverty. [1] 

China’s success has been primarily due to manufacturing as a low-cost producer. This is attributed to a combination of cheap labor, good infrastructure, relatively high productivity, favorable government policy, and some say, an undervalued exchange rate. The latter has been sometimes blamed for the China’s bulging trade surplus (US$262.7 billion in 2007) and has become a major source of dispute between the PRC and its major trading partners – the US, EU,

and Japan – despite the yuan having been de-pegged and risen in value by 20% against the US$ since 2005.

China’s export-oriented economy is truly global in nature, and is intricately inter-dependent on the US and other developed economies. Over a period of time, China has amassed foreign exchange reserves in excess of three trillion dollars, and has invested heavily in US Treasury bonds. The liquidity acts as a safeguard against recession, giving China the capability to bail out its economy and others’ by way of large injections of cash, as it did in the case of the recent global economic crisis. Chinese industry has grown manifolds in the past few decades and it will be very prudent to say that China today is a manufacturing hub of the world. China has similarly taken giant leaps in the realms of science and technology, education and military modernization. China has been among the world’s fastest growing economies, with real annual gross domestic product (GDP) averaging nearly 10% through 2011.

In recent years, China has emerged as a major global economic and trade power. It is currently the world’s second largest economy, largest merchandise exporter, second largest merchandise importer, second largest destination of foreign direct investment (FDI), largest manufacturer, largest holder of foreign exchange reserves, and largest creditor nation.

Factors Fuelling China’s Economic Juggernaut

Economists generally attribute much of China’s rapid economic growth to two main factors: large-scale capital investment (financed by large domestic savings and foreign investment) and rapid productivity growth. These two factors appear to have gone together hand in hand. Economic reforms led to higher efficiency in the economy, which boosted output and increased resources for additional investment in the economy.

China has historically maintained a high rate of savings. When reforms were initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of SOEs, which were used by the central government for domestic investment. [2] 

Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings. As a result, China’s gross savings as a percentage of GDP has steadily risen, reaching 53.9% in 2010 (compared to a U.S. rate of 9.3%), and is among the highest savings rates in the world. [3] The large level of savings has enabled China to boost domestic investment. In fact, its gross domestic savings levels far exceed its domestic investment levels, meaning that China is a large net global lender. Several economists have concluded that productivity gains (i.e. increases in efficiency) have been another major factor in China’s rapid economic growth. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade and services sector.

China’s economic growth has been a combined outcome of principals which have been a combination of conventional Western thought process and Chinese thinking. The stupendous growth has proved the western economists, who believed in the efficacy & primacy of Washington Consensus, wrong. China has followed a model which has been termed by "Joshua Cooper Ramo" as ‘The Beijing consensus [4] . To the degree China’s development is changing China it is important; but what is far more important is that China’s new ideas are having a gigantic effect outside China. China is marking a path for other nations around the world who are trying to figure out not simply how to develop their countries, but also how to fit into the international order in a way that allows them to be truly independent, to protect their way of life and political choices in a world with a single massively powerful centre of gravity [5] . The ‘Beijing consensus’ is fast replacing a twenty years old principal known as Washington consensus.

Beijing Consensus: An Explanation for China’s Growth

"China is writing its own book now. The book represents a fusion of Chinese thinking with lessons learned from the failure of globalisation culture in other places. The rest of the world has begun to study this book." 

Ramo

The BJC (Beijing Consensus), which first gained notoriety in 2004 when Joshua Cooper Ramo published his paper—The Beijing Consensus—through the United Kingdom’s Foreign Policy Centre, is based upon three overarching ideals of Chinese development, which in turn suggest "how to organise the place of a developing country in the world" [6] Â . These three ideas are summarized in succeeding paras.

Innovation. This model states that in order to reduce friction losses to reforms the govt must actively innovate in order to address the challenges introduced by the changing economic and social environment [7] . Another author phrases this as a commitment to "constant tinkering and constant change, and a recognition that different strategies are appropriate for different situations" [8] . China, since 1978 has placed immense emphasis on the innovation. It has remained focus on the development by means of creating effective policies, thus solving the problems for the people. This created conditions which were conducive for rolling out of economic reforms. Chinese govt also relied heavily on the surveys which they conducted in order to read the pulse of the populace and hence constantly amending the policies so as to suit the development [9] .

Pursuit of Dynamic Goals/Rejection of Per Capita GDP. China in their pursuit for economic development rejected the idea of measuring economic growth based on the per capita GDP as be all and end all parameter of economic

growth [10] . This was a direct disregard to the existing Western perception which are known to weigh these figures heavily as a yard stick of measuring economic growth. Instead China embarked on a journey which suggested an increased focus on measures such as quality-of-life and individual equity, areas that China strongly focused its attention. [11] China also propagated the idea of balanced development with five-balances’: balancing urban and rural development, balancing development among regions, balancing economic and social development, balancing development between man and nature, and balancing domestic development with opening wider to the outside world.

Self Determination. The Beijing Consensus contains a theory of self-determination, one that stresses using leverage to move big, hegemonic

powers that may be tempted to tread on your toes. China’s very emergence is remaking the international order. Chinese officials’ interest in the country’s peaceful rise is rooted in their worry that China’s current acceleration to international power may shake the world too much, undermining the country’s ability to grow and to maintain a stable internal and external balance [12] . BJC emphasizes the need for developing countries to actively seek independence from outside pressure, as it is imposed by "hegemonic powers" such as the United States [13] .

CHAPTER III: DEMOGRAPHIC CONCERNS AND THE SOCIAL CONFLICTS

Demographic Concerns

Demographic Dividend. Demographic dividend refers to a period of time with relatively low children and elderly dependence rate and abundant labor force. It is a period when the overall economy shows high labor force participation rate, high savings rate, and high labor allocation efficiency. It is also a period of decline in fertility rate and children’s dependency, a rise in proportional working-age population, and a relatively low ratio of the elderly population over total population. It refers to gains or losses in per capita income brought about by changes in a population’s age structure. It is expressed as the commonly used "dependency ratio" which is the ratio of the dependent age population (such as 0-14 years and 60 and above) to the productive – age population (such as 15-59 or 20-59). [14] 

This phenomenon has been clearly visible in Chinese economic growth. Today China has shifted from a period of high fertility, high mortality and low natural growth to a time of low fertility. In fact it has silently entered into ‘post transition society’ where life expectancy has touched new heights, fertility has declined to low level and a rapid aging population is on the horizon. The median age of youth in China is 35.5 years and the dependency ratio is 37 percent. Within less than forty years, China has exhausted its first demographic transition and is now fast becoming an aging society. [15] 

The effect of age structure of population of the state on its economic profile has always been an important aspect of study. Whereas, a young and skillful working population has always been beneficial to the economic growth, the old dependent population reverses that trend. As this happens to be the first abstract to support the hypothesis, it becomes prudent to examine the emerging contours of demographic profile of China and its impact on the economy.

Background

China includes one-fifth of the world population in a geographically huge and varied country. It has had an advanced civilization for around three millennia. Its strong hierarchical patriarchal family structure has persisted for 2 ½ millennia based on Confucianism. The Chinese empire was strong and widespread in the

late 17th and the 18th centuries, but dynastic decline in China’s last dynasty

(the Manchu or Qing Dynasty) then coincided with expansion of the European colonial powers in Asia in the 19th and early 20th centuries. Under severe military and political pressure, the dynasty was overthrown in 1911. After four decades of turmoil, Japanese invasion, World War II, and civil war, the Communist Red Army led by Mao Zedong emerged victorious and established the People’s Republic of China in 1949. [16] 

During most part of 1950s and 60s, China’s fertility rate remained relatively high. As a result, the population grew rapidly and the age structure saw an increase in the younger population during that period. Incidentally, there was a tragic famine during 1959-1961 which brought down the fertility rate. It brought about as many as 20,000,000 deaths due to a break down in agricultural production and resulting food shortages. On an average, in China the Total Fertility Rate (TFR) during this period was six children per woman in the first half of the 1960s. [17] The TFR of this magnitude led to a population explosion and population reached approximately 800 million in 1960.

To obviate the difficulties of provisioning food to entire population Chinese communist govt of 70s, instituted a forceful family planning program in the 1970s in both urban and rural areas. The fertility level dropped to half in less than a decade, population growth was reduced to a more manageable level, and the process of the aging of China’s population structure began. Now, nearly four decades later, children constitute a much smaller share of the population, comparatively smaller birth cohorts have entered the working ages, the population has a bulge in the middle and older working ages, and the elderly population is growing in absolute size and as a proportion of the population.

One Child Policy. It was during this time that China’s notorious one child policy was conceptualized and introduced in 1978. The policy was implemented in 1980s with forced abortions, infanticides and strict penal measures against the defaulters. The authorities assert that the policy has prevented 250 to 300 million

births since its commencement until 2000 and around 400 million births from 1979 to 2011. [18] 

The population of China has risen from just over 0.5 billion to 1.35 billion in the past 60 years and is projected to peak in 2030 at nearly 1.5 billion. As is well known, China has seen many millions migrate to the coastal cities in recent years, so population trends vary considerably across regions.

Reasons for Demographic Debit or Negative Demographic Dividend

TFR. Total fertility rate(TFR) of china dropped significantly from six per woman in 1960 to two per woman in 1990-95. During the years of 1975-1980 the

TFR saw the steepest decline in the country. Introduction of One Child policy was single major contributor to this. Consequently, the aging population began to overtake the younger one and those who aged above 60 formed a significant chunk of the population.

Declining Mortality Rate. With the improvement of health and medical conditions, life expectancy has significantly increased in China. This has resulted in the problem of aging population. Despite concerns over the collapse of the collective rural public health care system in the 1980 and increasing incidents and reports of air pollution, food poisoning, and public health crises (such as SARS epidemic in 2003), the Chinese population’s overall health has

continued to improve, with the spread of affluence. Starting at 40 years soon after mid-century, life expectancy increased precipitously in the 1950s and 1960s, has now reached approximately 73, and is expected to be nearly 80 by 2050. [19] 

While much of the mortality decline can be attributed to rising living standards, the extensive public health system underwritten and organized by the government also helped reduce illness and death "Barefoot doctors," peasants

who received rudimentary medical training, brought preventive and basic health care to millions of rural Chinese. [20] 

Impact on Economy

China’s rapid economic growth over the past few decades has been often attributed to its demographic dividend. According to the data from the World Bank, the structural advantage of demographic dividend contributed more than 30% of China’s aggregate economic growth. However, as demographic dividend is on a waning phase the low-end labour market which fuelled the growth of industrial sector has also started shrinking. These conditions can adversely impact conventional profit model and future economic growth. If China maintains its current economic structure and continue to propel its economic growth on exporting low-end manufactory goods, China will be trapped in low-end mass production with cheap labor and high cost of natural resources. In order to avoid this trap and promote future economic growth, China has to transform its current unsustainable demographic dividend structure into a more sustainable and quality-oriented structure.

Of late, China has been experiencing labor shortage. The problem initially appeared in eastern coastal cities and has spread into major inland cities and become a national concern. This trend underlines the end of "the Chinese golden age of labor surplus."

Since the start of economic reforms of the 1980’s, China’s proportional labor force has been on rise every year. Between 1980 and 2010, China has witnessed a declining birth rate from 20.19% in 1980 to 12.14% in 2010. This change has adversely affected the Chinese economic growth. Since 2005, the population dependency ratio has remained below 40%. Studies have shown, for every 1% reduction in population dependency ratio, there will be a corresponding 0.115% increase in China’s economic growth rate. Between 1982 and 2007, decline in population dependency has promoted a total of 2.4% economic growth rate, contributing to roughly 25-30% of China’s GDP growth in these years [21] .

At present, China’s demographic dividend is disappearing. First, increasing aging population has become a big concern in Chinese society. The 6th Chinese National Census has shown an aging rate at 8.9%. By the year of

2050, the expected aging rate would be 30%, much higher than the expected global standard (20% by 2050), indicating a rapid growth in aging population. Second, the "Lewis turning point" [22] is also emerging, indicating a decline in labor surplus in rural areas. According to the past national census, the number of migrant workers (who works outside of their hometown for six months and longer) increased by 6% between 2002 and 2006, yet this figure has gone down to 1.7% between 2006 and 2010. The overall growth rate of migrant workers has slowed down. According to the studies published by the Chinese Institute of Social Studies, between 2000 and 2013, China’s population dependency ratio is still growing at a relatively low growth rate.

The year of 2013 is expected to be the turning point of Chinese population dependency rate. After 2013, the population dependency rate will start to decline, and the spillover effect of direct demographic dividend will decline correspondently. The expected rate of migrant worker growth rate in the next 10 years is 0.8-1%. More importantly, the Chinese per capita GDP is relatively low compare to other countries that have the same or similar demographic dividend conditions (including Japan, South Korea, Singapore etc.) The GDP per capita in these countries is around $20,000 to $30,000 per year, whereas the GDP per capita in China is only $10,000. Low per capita GDP indicates a possible decline in living conditions as the overall population age. Overall, China’s high economic growth rate is not sustainable under its current demographic dividend [23] .

Over the past several years, China’s miraculous economic growth has heavily relied on the surplus of two major factors of production, namely labor surplus and capital surplus. It is widely acknowledged that China’s demographic dividend has remained at its initial stage, a stage relying on the quantity, instead of the quality, of its labor force. We can call this stage the stage of quantity-oriented demographic dividend. On the contrary, quality-oriented demographic dividend values the accumulation of human capital, human resources development, and improvement of total factor productivity of the labor force. In the model of quality-oriented demographic dividend, the profits of economic development can achieve sustainability by promoting and strengthening the formation of human capital.

From this perspective, experiencing a disappearing quantity-oriented demographic dividend is not horrific. On the contrary, it is a necessary and unavoidable process in China’s socioeconomic and structural transformation. Hence, putting in a larger context, China needs to recognize the importance of human resources, and establish the primary status of human resources in socioeconomic development. Strategically, they should engage in improving the quality of human capital, and avoid the vicious cycle of ‘low income-low education investment-low feasible capacity-low income.’

The Social Conflicts

The societal faultlines in China have grown manifolds since last few years have been increasing cases of social unrest which have come to fore of late. The increase in citizen protests and petitions is driven in part by China’s massive social and economic transformations over the last several decades. However, major reason for the same has been cited to be flawed govt policies, lack of independent political identity and absence of legal institutions which can be used to address their grievances against the govt officials.

This is no hidden fact that there has been steady rise in the social unrests in China. In the summer of 2005, senior Chinese officials announced that "mass incidents," including riots, strikes, demonstrations, and protests, had increased from 8,700 in 1993 to 74,000 in 2004. [24] Tibetan protests against the 2008 Beijing Olympics are a clear indication that the social conflicts in china continue unabated despite the magnificent growth recorded by the country.

Causes of Unrest. The causes of these unrests are not difficult to fathom, while clan or ethnic conflicts trigger some clashes, others are direct outcome of citizen’s dissatisfaction over the governance and related issues. There have been instances when the people have taken to the streets to show their dissent against the corrupt polity and the anti-people policies of the govt. Since the late 1990s, government seizures of village land and urban housing for development projects have become increasingly important as a cause of citizen protests and petitions. Citizen discontent regarding these issues reflects a range of problems, including ongoing economic transitions, weak legal protections for citizen rights, and a limited social security net for the poor and disadvantaged.

Increasing social unrest in China is also directly linked to governance flaws at the heart of the Chinese state. Local Party authorities enjoy extensive control over the media, judiciary, local legislatures, and village committees. Chinese citizens consequently lack independent political channels to influence government decisions that affect their lives. They also lack independent legal channels to check decisions of local officials that infringe on their rights. As a result, Chinese citizens increasingly use organized protest activities to circumvent the control of local officials over formal political and legal institutions and prompt the intervention of higher-level officials in resolving citizen grievances.

Consequences. The social and economic unrests in China seem to have far reaching results. China’s political and social controls fuel a destabilizing cycle of social unrest. First, these controls appear to be contributing to atrophy of the formal legal system as Chinese citizen resort to other measures to resolve their grievances. One might have expected that China’s population growth, economic development, and rapid urbanization over the past decade would have led to increasing citizen use of the courts as a locus for the resolution of their grievances. This appears not to be the case. As mentioned earlier, the total number of civil cases in China has remained stagnant since 1995, while administrative cases have declined since 1998. In contrast, both citizen petitions and mass incidents have increased steadily since the early 1990s. [25] 

Impact on Economy. The ongoing simmering in the Chinese society does not only harm the country but is likely to have adverse impact on the economic growth. As the concerns for security grow, the country is likely to face a drop in FDI, which can affect the economic growth. Unrest poses a real, if indirect, political threat, however. Local authorities have essential responsibilities for governance, law-and order, and delivery of public services. Beijing must find ways to discipline individual corrupt leaders without undermining the legitimate authority of all local governments.

CHAPTER IV: REGIONAL DISPARITY

While there has been phenomenal economic growth in China, by no means this growth has been evenly distributed amongst the entire 31 provinces of China. From 1978 to 1998, Fujian (on the eastern coast), the fastest growing province, experienced an average annual growth rate of 13.9 percent in real GDP; whilst Gansu (on the hinterland), the slowest one, grew only at 6.7 percent. In 2000, the top 10 provincial units with the highest GDP per capita were mostly from the eastern coast of China. The GDP per capita in Shanghai (on the eastern coast), the country’s highest, was 9.65 times the level of Guizhou (on the inland), the country’s lowest. [26] 

This is a fact that China is a huge country with enormous spatial differences in terms of availability of natural resources, population and local markets and economic activities. One important property of the neoclassical growth model is its prediction of convergence—poor nations or regions tend to catch up with the rich ones in terms of the level of per capita product or income. However, the stark difference in the growth of different regions defies any simple logic. A question of great interest is whether there exists convergence in real GDP per capita across regions in China such that the poor regions are catching up with the rich ones, or the poor regions and the rich regions diverge into two clubs such that the gap in the level of living standards between the poor and the rich is persistent or even widening. [27] Regional inequality in China has risen in the past two decades, a somewhat puzzling phenomenon as market-oriented

reforms should facilitate resource flows that tend to equalize factor returns across regions.

Income Inequality

Prior to 1980s China was one of the countries which had much lesser levels of income inequality, however, this changed drastically with the introduction of economic reforms. China’s consumption inequality, measured by the Gini coefficient, was 0.376 in 1992 (World Bank (1996)). And it increased to 0.415 in 1995, making the 37th highest among 96 countries all over the world (World Bank (2000)). ‘so steep a rise in inequality in such a short time is highly unusual in both the historical and the comparative perspective’, according to World Bank (1997) [28] . A careful examination by the scholars has suggested that the gap initially narrowed a bit and then expanded to the newer levels.

In income terms, rural households in China’s coastal regions—especially the East Coast region centered on Shanghai—are far and away better remunerated than those in the interior. By 2005, rural households in the relatively small East Coast region, with total population of 142 million people, had at least double the rural income level of any in interior regions. Large income disparities have been growing larger over time. On average for both 1985-to-2005 and for 2000-to-2012, the regions that were already leading in terms of per-capita rural income at the outset of the period also grew faster in real terms during that period. The rankings for both levels and growth rates are the same, implying divergence. [29] 

As per a research conducted by the Carneige endowment organization in

2005, the per capita GDP varied from as high as US $ 3578 in East coast region to as low as 1053 in the southern hinterland of China. This makes the highest to lowest per capita income ratio more than 3.5.

Urban Rural Divide

One of the major contributing factors to the income inequality in China is the urban rural divide. The gap has expanded manifolds during the economic reforms era. Between 1983 and 1995, the rural-urban inequality rose by 29 percent from 0.062 to 0.085, which accounted for 56 percent of the increase in the overall regional inequality. In part, today’s rural–urban gap reflects the institutional legacies of socialism. Beginning in the 1950s, Communist Party leaders clearly separated urban and rural residents through a strictly enforced residential permit (hukou) system, establishing urban and industrial development as the main objective of economic planning [30] .

Whereas urban workers were provided with the life time occupation, health benefits, housing and pension, the rural population was converted into collectives and provided basic amenities. The occupation like agriculture and animal husbandry were neglected. In order to subsidize rapid industrialization, the planning system set prices and directed investments in a manner that discriminated against agriculture and rural areas, leading to sharp differences in the living standards of urban and rural residents.

The divide becomes more pronounced when one sees the consumption patterns, as consumption is considered to be a better measure of living standards than income. In pre-reform period, the ratio was consistently above 2.5, reaching the highest point of 3.7 in the late 1970s. Economic reforms introduced a series of policies to lessen urban – rural gap. These policies included increase in procurement prices for agricultural products, the adoption of household responsibility systems, and the relaxation of restrictions on labour mobility to nonagricultural activities in the rural areas and to employment in cities. As a result, the ratio declined to less than 2.5 for most of the 1980s. [31] 

However, economic reforms failed to create an environment for sustained reduction of urban – rural inequality. In mid- eighties these policies were reversed. Prices of agricultural produce stopped rising whereas input costs increased substantially. State investments were heavily poised towards the urban and industrial sector at the expense of the rural and agricultural sector. Apart from industrial policy which was biased in favour of the formal urban sector, rural migrants to the cities were also barred from accessing all kinds of benefits and services (housing, education, and healthcare) provided to urban residents. They have to pay higher prices in parallel markets for such services. These institutional barriers introduced a wide urban – rural income gap with little possibility of adjustment via migration. Consequently, urban – rural per capita consumption ratio rose again from the late 1980s to the 1990s. [32] 

A World Bank (1997) study shows that the rural-urban income gap is responsible for a third of China’s total inequality in 1995 and a half of the increase in inequality since 1985. [33] 

Coastal and Inland Divide

China is a large country with long-lasting uneven regional development. The coastal areas have always been ahead of the inland in terms of economic development and modernization. Geography plays a role in producing such regional differences via three channels. First, compared with coastal region, inland regions have less favorable natural conditions for agricultural production because of saline soil, high elevation, severe climate and so on. The rugged physical conditions also increase the costs of infrastructure and industrial development. Second, the far-off distance of inland regions limits the access to seaports and international market. Third, geography also affects development through its effect on the access to education, knowledge spillover, flows of productive resources, spatial clustering, as well as institutional reform and effective implementation of government policy, as suggested in the literature of the new economic geography (Krugman, 1995; Sachs et al., 2000).

A detailed analysis of the economic divide reflects the deep divide which separates the coastal china from the inland china. This divide has become a major factor in the regional divergence of the economy. After decomposing the GE coefficient of real consumption per capita across coastal and inland groups, Kanbur and X. Zhang (2005) found that over 1983—1995, the coastal-inland inequality widened by 300 percent from 0.005 to 0.021, which accounted for 39 percent of the increase in the overall regional inequality. Meanwhile, the percentage contribution of the coastal-inland inequality to the overall inequality increased sharply by 168.5 percent from 6.45 to 17.33 percentage points. [34] 

The coastal inland divide has been more pronounced in rural China where the gap widened to more than 200 percent and alone accounted for more than 65% of the regional inequality. However, the geographical advantages of the coastal region had not been realized until the economic reforms in 1978. For example, in the pre-reform period, Guangdong province along the coast did not enjoy any geographical proximity to the world market, and its income level was nearly equivalent to that of Sichuan province in the inland. It is the exposure to international trade that changes the internal relative comparative advantages between these two provinces. The institutional reforms make it possible for Guangdong province to better exploit its geographical advantage (Kanbur and Zhang, 2005). Within the context of Chinese economy, both integration into the global economy and changes in institutions are largely driven by the government policies.

Since 1978, the focus of government policies in China has been on opening-up to the outside world, decentralization in economic decision-making and market-oriented reforms. These policies promoted rapid growth in the coastal areas, but had far less impacts on the inland provinces. As a result, the gap between the inland and coastal regions widened continuously and rose sharply in the 1990s, thus causing overall inter-provincial inequality to move upward. [35] 

Causes of Ineqaulity

When analyzing the possible causes of these inequalities in China some of the factors stand out. These factors vary from the availability of natural resources to govt policies. These factors have been analyzed in the succeeding paras.

Geographic Reasons. It is a well-established fact that the geography of any country or region contributes significantly to the economic growth of that very region. One of the most obvious reasons which stands out for the high growth rate witnessed by the coastal region is their relative accessibility and lines of communication when compared to the interiors of China. The fact that the coastal China is one of the most preferred destinations for the investors is a testimony of the importance of the transportation and lines of communication. In the industrial age, water transportation has the lowest cost for moving goods over extended distance. The growth effects of trade are well known, beginning with Adam Smith’s observation that productivity improvements are enabled by the greater division of labor that, in turn, is enabled by the expansion of the market [36] .

Govt Policies. The policies of the Chinese govt have had a profound influence on the disparate growth of the nation. Once the economy was opened, the govt decided to set up four SEZs in two coastal provinces: Guangdong and Fujian. In the SEZs, private firms and foreign-invested firms were granted considerable privileges such as tax incentives, exemption from import duty on intermediate inputs, the right to retain some or all of the foreign exchange earnings, and the flexibility of employment. The success of these SEZs were replicated again, albeit, in coastal China once again thus ignoring the Hinterland. The coastal regions benefited more from this push than the inland regions, not only because they have advantageous geographical conditions to attract FDI,

but also because they had already developed social and economic environments more appealing to the investors than the inland regions.

Urban Biased Policies. The urban reforms in China that started in 1985 were far more complicated and difficult than the initial rural reforms. Due to concerns for economic and political stability, the government installed a set of urban-biased policies after 1985. Urban price subsidies totaled 71.2 billion yuan in 1998, which was 7.6 percent of government’s budget. The government also subsidized the urban-based, loss-making SOEs. Such subsidies totaled 232.5 billion yuan for the period 1986—1990 and 206.1 billion yuan for the period 1991—1995, which accounted for 19 percent and 9 percent of the government’s revenue, respectively [37] . The shares of the budget devoted to cities ranged from 52 percent to 62 percent for the period of 1986—1992. In addition to fiscal transfers, the urban state sector received preferential credit allocations that caused redistributions of income in favor of the urban areas, too. These urban-biased policies have led to a steady increase in the rural-urban inequality, which has consequently contributed significantly to the rising inequality in China in the reforms era. Regions in China vary widely in the urbanization rate. Because provinces with a higher level of GDP per capita in general have higher urbanization rates, the widening rural-urban inequality is translated into the rising migration of the rural population to the urban areas in search of better prospects.

Impact of Regional Disparity on Chinese Economy

Disparate regional growth of China was initially believed to have a positive impact on Chinese economy. However, growing inequality can harm the nation in more than one way.

Social Dissatisfaction. The unequal growth in a country creates a rift between the regions and thus sowing the seeds for the people’s movement. As the gap between the haves and have-nots widens across the country, there are chances of increasing unrest in the parts where the population feels alienated or dissatisfied. Social dissatisfaction coupled with the political tensions creates an atmosphere which is detrimental to the economic growth and investments.

Negative Inclusive Growth. With some of the major world economies getting engulfed by the recession, an alternative to finding the market for the manufactured goods is to look inwards, towards own country. But regional inequality may substantially reduce the chances of China being able to find a worthwhile market in the hinterland.

While economist stumble on various other arguments to define the growth patterns one thing which seems certain is that if the growth remains as unequal as it is now China will find itself in a situation where Eastern coast will have to share the burden of the non-performing Western inland thus reducing the

economic wellbeing as it gets redistributed equally amongst various regions. This in turn will not only impede the growth but will also create a different type of dissatisfaction amongst the residents of Coastal China.

Increased Migration. Migration of rural population to urban areas has already been a major issue in China, if the trend continues it may go to alarming levels thus denuding major chunk of inland from valuable human capital.

CORRUPTION

With Chinese economy soaring at a near ten percent growth, a threat that looms large and threatens to derail the economic resurgence of China is corruption. Combating and managing corruption in China is one of the major challenges for Chinese policy makers and thinkers. This is one of the most difficult tasks as it will require politically tough decisions which have so far been avoided by China for the fear of undermining the strong hold of CCP.

The experiences of other developing countries show that runaway corruption undermines critical governing institutions, fuels public resentment, exacerbates socioeconomic inequality, creates massive economic distortions, and magnifies the risks of full-blown crises [38] . The failure to abate the corruption may spell the downslide of Chinese economy.

Measuring the corruption in China is a difficult task because of lack of transparency and illicit nature of the works. However, various reports, govt stats, official audit and public perception confirms that corruption is not only prevalent but has scaled new heights.

Today corruption is a major concern for the common Chinese people and party elite. Both structural and non-structural corruption has been prevalent in China. Non-structural corruption exists around the world, and refers to all activities that can be clearly defined as "illegal" or "criminal," mainly including

different forms of graft: embezzlement, extortion, bribery etc. Structural corruption arises from particular economic and political structures; this form is difficult to root out without a change of the broader system. [39] 

Characteristics of Chinese Corruption

Corruption in China is mainly concentrated in the sectors which have predominant presence of govt. These range from infrastructural projects to land sale to financial services. The level of govt corruption can be gauged from the news article published in BBC daily on 8 Jan 2010 which stated that more than 106,000 officials were found guilty of corruption in 2009.

Absence of free press and single party rule has made it possible for the corrupt to thrive in the environment without being checked. The pervasiveness of such corruption can be seen in the downfall of many local officials in charge of transportation and urban planning. Half of provincial transportation chiefs in China have been sentenced to jail terms (some have even been executed) for corruption.

A study carried out by the scholars indicates that the large scale corruption has been prevalent in land acquisition, financial sector and other state institutes. A survey of sixteen cities conducted by the Ministry of Land Resources in 2005 found that half of the land used for development was acquired illegally. According to the head of the Regulatory Enforcement Bureau at the Ministry of

Land Resources, the government uncovered more than one million cases of illegal acquisition of land between 1999 and 2005. [40] Similar is the case with the banking sector which has become notorious for receiving kickbacks from the applicants for approval of loans.

Causes of Corruption in China

In the root of the problem of the corruption in China lies the partially reformed economy and the political system of China. Lax anticorruption laws and involvement of high rung officials of CCP in the corruption cases further aggravate the existing problem.

Partially Reformed Economy. International experience makes it evident that the corruption is closely related to the govt’s involvement in the economy; countries where the govt controls significant economic resources and intervenes extensively in the economy tend to be more corrupt. In China, the state is deeply entrenched in the economic chores despite three decades of economic reform. Today, the public sector alone accounts for more than 35 percent of GDP and evidently controls the nation’s largest corporations; this has led to monopolization amongst the key industries such as banking, power generation, and natural resources. The govt also owns trillions of dollars in fixed assets and makes hundreds of billions of dollars in new investments each year. In addition, the state also controls key prices (most importantly the interest rate and land prices) and tightly regulates certain economic activities (real estate development and infrastructure). This kind of monopolistic behavior by the CCP

has led to creation of a hybrid economy [41] which is a fertile ground for corruption.

Laxity by the Govt. China has baffled the world by meting out harsh punishments to the corrupt officials including the prominent leader Bo Xilai, however, the laws remain deceiving to the general public. Official enforcement data indicate that Beijing punishes only a very small proportion of party members and government officials tainted by corruption. For example, nearly 80 percent of the 130,000–190,000 CCP members disciplined and punished by the CCP annually since 1982 got at most a warning [42] . Only 20 percent were expelled from the party. Less than 6 percent were criminally prosecuted. In recent years, half of those convicted of corruption received suspended sentences and did not serve any jail time. The odds of an average corrupt official going to jail are at most 3 out of 100, making corruption a high-return, low-risk activity.

Effects of Corruption

Though it may seem that the rampant corruption in China does not have any impact on the economic growth of China but the rate of growth in China could have been much more than what it is now had the corruption not moderated it. The bad and good laws were equally bypassed using the tool of corruption and the cases of graft in China has increased manifold in the recent past. China’s economic institutions are evolving away from age old shackles of state socialism, and a growing economy is largely fuelled by the emergence of middle and upper classes who are relying on strong rules to pull the society upwards. Any reduction in the prospective degree of lawful control can be detrimental to the economic interests that can be threatened by this extralegal behavior. It is hence reasonable to assume that corruption looms large as a threat to the evolution of an enforced rule of law and thus can impose net economic costs.

It may be noted that the economic cost of corruption is not calculated from the money that changes hand during the corrupt practices but from the reduced economic output that is an outcome of the same. This happens predominantly as the reduced, as individuals and businesses start making adjustments to meet challenge and extra cost posed by the corrupt public officials. This also results in reduction in the resource utilization, consequently, reducing the aggregate size of the output basket that can be produced from the resources available [43] .

It is estimated that the direct cost of corruption and the economic loss incurred on the basis of corruption in China can be as much as three percent of the aggregate GDP. [44] It is largely believed that the corruption in China is also a contributing factor to the regional inequality thus indirectly affecting the growth and fuelling the restive environment in various fringe regions of China.

Kickbacks, embezzlements and bribery damage the economy most as they not only divert the public money into private pockets but also bias the choices away from the best firms and best technology towards a less satisfactory and below par alternative [45] . The impact is more devastating when the firms are involved in infrastructure building in the state.

Overall the negative effects of the corruption and the resultant creation of black money have given rise to the wealth accumulation amongst the leaders and public office holders. This has also resulted in creation of a parallel economy, which though is much smaller in size but still exist and can have a negative impact on the economic growth.

CHAPTER VI: OTHER FACTORS THAT MAY IMPEDE CHINESE GROWTH

In last five chapters we have seen and analysed various factors or contributors which may slow down the Chinese economic juggernaut. These factors formed basis of our hypothesis during the research. However, during the research it was found that there are certain other factors that may act as major stumbling block in China’s quest to lead the world. These factors are:-

(a) Energy Concerns.

(b) Environmental Pollution.

(c) China’s Fragile Financial System and Role of SOEs.

Energy Concerns

China’s growing quest for energy and its visible inability to meet the demand from indigenous production has given rise to the energy security conundrum. China has aggressively looking outwards to meet its energy requirements. Its public oil companies have been buying stakes into various oil and natural gas fields across the country.

China’s energy security concern can be classified as domestic economic development issue rather than a part of foreign policy for several years, except for rare strategic issues such as the location of pipelines in Central Asia or border disputes related to energy resources. Coal is one of the abundant resource in China, it has been the one of the most important fuel for industries for decades. China’s oil self-sufficiency ended in 1993, when it realized that it was no longer able to meet the growing domestic demand for oil. It was hence forced to begin importing oil to meet domestic demand. China did not realize the urgency and importance of energy security until the late 1990s. China’s energy consumption reached a record high in recent years due to China’s rapid economic development, expanding middle class population, motorization, and urbanization. China became the world’s second largest consumer of oil after the United States and the third largest net importer of oil in 2008.

As on date China is importing more than 50% of its oil demand thus putting additional strain on China’s economy. Further any disruption in the supplies of oil from the Middle East will become an alarming situation for China. China will also be susceptible to any fluctuation in the global oil prices.

Security Concerns. As is a well-known fact that China’s oil supplies are bound to be transported though the sea. This makes the security of SLOCs a major concern for China. China’s quest for the oil hence requires China to ensure that its SLOCs are well defended. China’s oil supplies pass through Strait of Malacca which acts as a choke point and hence needs to be well guarded. This necessitated China to modernize and develop its Navy.

Impact on Economy. China’s overt dependence on oil imports make the economy prone to external market dynamics. As has been discussed above any change in the oil prices outside will have adverse effect on the Chinese economy. This makes it imperative on China to explore other options outside which includes buying of the oil fields and oil blocks outside in Africa and other parts of the world. The burden of these purchases will have to be borne by the state which will increase the oil bill thus destabilizing the fiscal balance.

Environmental Pollution

China in its quest to grow has taken the route which has caused alarming levels of environmental pollution and carbon emissions of China are second only to US. In a survey done in the 2010 about 113 cities failed to meet the national air standards. According to World Bank 16 out of the 20 most polluted cities of world are in China. Coal is the number once source of air pollution in China. China gets 80 percent of electricity and 70 percent its total energy from coal