Asia’s Real Challenge: China’s “Potemkin” Rise

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Asia’s Real Challenge: China’s “Potemkin” Rise

“China’s rise is more likely a statistical fiction, cooked up by the Chinese ruling elites to aggrandize their power and glory.”

If one looks only at the explosive growth of China’s Gross Domestic Product (GDP) since the country began to embrace capitalism and global integration more than thirty years ago, it is impossible to deny that China’s rise is both real and breathtaking.  In 1978, China’s GDP was US$214 billion in purchasing power parity (PPP).  By 2012, it was, unadjusted for inflation, roughly 40 times bigger (US$8.3 trillion in PPP).  Of course, there are other measurements of China’s economic rise, such as its share of global steel production (it is now the largest producer, with an output of more than 700 million tons in 2012), energy consumption (it has surpassed the United States to become the world’s largest consumer of energy), and foreign trade (its total imports and exports in 2012 were $2.84 trillion, second only to the U.S.’s $3.85 trillion).

To be sure, given the Chinese officials’ fondness for fudging numbers, many people both inside and outside China (including Mr. Li Keqiang, the new prime minister) are justifiably skeptical about the credibility of China’s GDP data.  In some cases, such skepticism can become so extreme that it leads many to conclude that China’s rise is more likely a statistical fiction, cooked up by the Chinese ruling elites to aggrandize their power and glory.

Vigilant obsession with the accuracy of the Chinese growth data may expose, from time to time, minor acts of fraud. Chinese provincial officials habitually report growth numbers that, when added up, significantly exceeded the total calculated by the Chinese National Statistics Bureau.  But such fastidiousness comes at a great cost: we may overlook a problem far bigger than fake GDP data.  The real scandal in China’s rise is not its exaggerated speed, but the shockingly low quality of its growth.  Low-quality growth has  undermined China’s social fabric and individual welfare.  It also makes China look far stronger on paper than in reality.

To understand why this is the case, we must ask a different question. Instead of harping on Chinese GDP numbers, we should instead scrutinize the quality of China’s rise.  Quibbling whether the Chinese economy has been growing at double-digit or not is uninteresting since one undeniable fact is that whatever measurements of speed we use, the Chinese economy has grown many times larger. 

The real issue today is not the size of the Chinese economy and the rate of its growth, but its inner strength and quality.

Without a deeper appreciation of the reality and consequences of China’s low-quality growth, gullible observers will likely be as impressed with China’s rise as Empress Catherine the Great was with Potemkin Village.

The most evident sign that China has sacrificed quality for speed in its economic growth is its catastrophic environmental degradation.  This year’s air pollution crisis is just one reminder that Beijing’s single-minded pursuit of GDP growth has been an unmitigated disaster.  It is not an exaggeration to argue that China’s long-term survival as a civilized nation is now at risk because of water pollution (two thirds of Chinese rivers are severely polluted) and contamination of soil by heavy metals (studies show at least 10 percent of the arable land was tainted with heavy metal in the late 1990s; a government-sponsored national survey of soil conditions conducted a few years ago yielded such alarming data that they are now classified as state secret).

Another measurement of China’s low-quality growth is the deterioration of social cohesion.  Instead of producing a “harmonious society,” low-quality growth has spawned high levels of inequality and official corruption.  Social mobility has declined. Trust has practically evaporated.  The government has lost its credibility.  The most worrisome evidence of deterioration of China’s social fabrics is the spread of corruption from the officialdom to the rest of society.  Today, ordinary citizens often have to bribe doctors and teachers if they want high-quality care and schooling.  Unscrupulous vendors peddle tainted or fake food (the latest scandal is the sale of rat meat as mutton in Shanghai).  Food safety has become a crisis.

A third piece of evidence that low-quality growth has undermined the wellbeing of average Chinese citizens is the lack of a social safety net.  The ultimate mark of a modern civilization and successful economic development is not measured in aggregate GDP data, but in the extent to which the state protects its citizens against unemployment, sickness, and old age.  Compared with the more developed parts of the world, China’s social safety net remains threadbare.  The majority of the Chinese population (mainly rural residents and migrants) has no pensions or meaningful healthcare insurance.  Even for those lucky enough to have such protections, the rapid ageing of the Chinese population as a whole means that their benefits are unlikely to be guaranteed since the Chinese state will not have the resources to finance them.

To further understand why China’s rise has been one-dimensional (in terms of GDP growth only), we need to examine whether economic development has also led to the rise of more sophisticated institutions and organizations that are essential to future economic dynamism.  On this measurement, China’s shortfall is astonishingly worrying.  Despite more than three decades of rapid GDP growth, China today still does not have a sophisticated market-driven financial system.  As a result, capital is misallocated and wasted.  Because of the ruling Communist Party’s fear of losing its political monopoly, China continues to lack the rule of law, another guarantee of prosperity and individual rights.  China may have some of the world’s largest companies and banks, such as China Mobile, PetroChina, Sinopec, China Construction Bank and others, but except for a handful of non-state companies (such as Lenovo, Huawei, and Haier), none is considered innovative or world-class.  For all the money Beijing has ploughed into “indigenous innovation,” the sad truth remains that, today, China continues to be an imitator, stuck in the lower half of the value chain.  Given the decay of China’s higher education system (another open secret), it is unlikely that the country can ascend the value chain as rapidly as its leaders have hoped, if at all.

Unfortunately, most outside observers are poorly informed of both the reality and the consequences of China’s low-quality growth.  As a result, two things happen.

First, they have become overly optimistic about China’s role in the global economy and governance.  They count on China to do more than it is capable of doing (regardless of Beijing’s willingness).  They simply do not realize that China is a giant who, to use a Chinese phrase, “looks strong from outside but is hollow inside.”

Second, they are poorly prepared if things in China start to unravel because of its low-quality growth.   Here we are not talking about the economic consequences of a Chinese slow-down (although they will be severe, particular to those countries and companies dependent on commodity prices, which are very sensitive to the marginal demand from China).   Intellectuals outside China should pay some attention to the effects of China’s worsening environmental degradation and food safety crisis on global food supplies.  Clearly, if the destruction of the environment and Beijing’s lack of institutional capacity to ensure food safety continue, China will have to import a lot of food from the rest of the world (Chinese tourists are already snatching up baby formulas wherever they visit).  China’s newly affluent, a demographic group most sensitive to quality, are voting with their feet in unprecedented numbers.  They are either emigrating themselves or sending their children or spouses abroad.

Of all the potential consequences of China’s Potemkin rise, one that has received the least amount of thought abroad is the durability of the political regime that is responsible for such low-quality growth.  At the moment, despite mounting evidence of China’s low-quality growth and lack of sustainability, few are asking the inevitable question: what happens to the Communist Party’s rule when the ill-effects of low-quality growth accumulate and produce a systemic crisis?

Now is the time to ask it.