26 April 2012

"Managing chaos: the fragility of the Chinese miracle" by Prem Shankar Jha

China’s story so far is impressive but mysterious. China’s economic growth, competitiveness in global trade and effective management of trade cycles are impressive. The seeming lack of sensitivity to social discontent, intolerance of dissent, and opacity in public policy/governance make it all mysterious.

Prem Shankar Jha, Oxford trained economist, journalist and diplomat does an excellent job in providing a peek into the good and the bad of China’s economy and politics.

China is a favorite with liberal economists. China vindicates their faith in free market. China’s is a story of relentless purposeful growth; smart management of trade cycles; and equally smart exploitation of opportunities in globalization. However, China’s is also a story of an economy trapped halfway in a failed transition suffering from inequality, corruption, and discontented population.

China grew eleven times in thirty years (1976-06). China’s trade with the world grew forty one times. Pretty impressive, by any standards.  However, while China as a whole was flourishing, large segments of its people were not. The “iron rice bowl” assuring life-long security gave way to growing inequality, unemployment, loss of land for farmers, marginalization of migrant workers, corruption, extraction, and growing social discontent. National leaders such as Deng Xiaoping in 1980s and President Jiang Zemin in 1990s preferred to chase growth rather than equity hoping that growth would eliminate the sources of discontent. Those dreams failed thanks to recessions that intervened. President Hu Jintao understood the need for equity and advocated “social harmony”. However, he is reforming the party instead of reforming the polity.  An untimely recession, likely according to Jha, would test China’s social harmony much more severely now than at any time in the past.

Jha has several interesting reasons why:

One, China’s growth is impressive; but exaggerated. Overstatement of growth could be in the range of 2%. That is not worrying. What is worrying is that China is in a state of denial about recessions. The published data show no recessions. However, China suffered three recessions in 1989-90, 1991-96 and 1998-01. China claims these as “soft landing” from hyper growth. However, the impact on society was quite huge.

Two, China’s growth is more due to investment in infrastructure than due to growth in consumption. These investments are not subjected to normal disciplines of market (evaluation of viability, securing funds from willing savers and bankruptcy risk to owners if things go wrong). These investments are made by those in power with privileged access to bank credit and without the burden of entrepreneurial risk; a recipe for enthusiasm prevailing over judgment.  As a result, China suffers from over-investment, excess capacity, bad debts and liquidity threat to banking system, and therefore, recession.

Three, China’s manufacturing is not efficient. The manufacturing for domestic market typically consumes for a given dollar of GDP, six times the resource required by an American or Japanese enterprise; three times that required by an Indian enterprise. (Manufacturing for export market is quite efficient; but mostly owned/operated by foreign investors).

Four, China’s growth is not due to “privatization”.  China's enterprises are anything but private. SOEs (State owned enterprises), the initial powerhouses, were weak and several of them could not survive recessionary pressure. The white elephant SOEs were rolled into profitable ones or sold to TVEs (Town and village enterprises). The TVEs were started by provincial and municipal governments using public land and coerced bank debts, and as ever, unmindful of economic risks. When recession posed challenges to the TVEs, the TVEs were “force sold” to technocratic managers and workers. Later the “nomenklatura” capitalists started thousands of enterprises. These cadre capitalists too had the same advantage: land from subservient municipalities, credit from subservient banks and freedom from the burden of entrepreneurial risk.  These enterprises are anything but private enterprise. They are born out of a coterie’s control over natural/financial resources and control over law. All these have resulted in:
  1. Overinvestment and oversupply that can lead to a deep recession,
  2. Liquidity threat to the banking system thanks to loans going bad and
  3. Shorter and sharper trade cycles that affect the poor more than the rich.
Five, China’s economic growth has not been a remedy to the society

  1. The growth started by “commandeering” arable land from farmers to set up development zones. The arable land in China has now come down to the barest minimum required to feed its population. 
  2. The growth did not create jobs. In the ten years period to 2006 the number of jobs shrank by 2 million. Migrant workers (with no security and severe challenges to peaceful existence) constitute half the urban labor.
  3. The growth punished the poor.  During good times, the controllers of SOEs/TVEs and the cadre capitalists of the so called private enterprises behaved like owners. During bad times, they behaved like political rulers and managed their resource crunch by doing away with social security benefits and imposing taxes on the peasants and the workers.
Six, China’s state and the party officials have become predators on Chinese society. Corruption has taken myriad forms when the state has access to finance; ability to commandeer resources; and ability to convert state enterprises into private enterprises.

Seven, Social discontent has been growing in China.

In summary, China’s economy is more made up of mega size investments in often unviable infrastructure projects creating surplus capacity and overinvestment. China has been prime pumping the economy to boost consumption. China may suffer inflation and recession in the near future. Social discontent, already high, can increase significantly. China lacks the political framework to buttress discontent.

Sustainable economic growth requires political stability. Political stability requires social stability. In the short run suppression can achieve social stability. In the long run, the sources of discontent need to be addressed to sustain social stability.

When China faces another recession (which according to Jha is inevitable given its circumstances) China may not be able to invest/spend its way out of a domestic recession as it did out of a global recession. Such an act may result more in inflation than in growth, triggering social discontent. Such a social discontent may be more difficult to handle in an age where 98% of population has mobile phones and 250 million people have access to internet. China cannot do a Tienanmen Square style suppression again.

On the other hand, a transparent and accountable government and rule of law may buttress the social discontent and help China achieve and sustain its destiny as a giant among nations.

Prem Shankar Jha presents his case in an engaging style. One must read this book to gain a fuller perspective about China.

1 comment:

Vishal Kale said...

Excellent Blog... read several of your posts!