This article first appeared in the St. Louis Beacon, July 13, 2012 - China is confronting economic and political difficulties. As its one-a-decade change in party leadership draws near, the path that current leaders choose will affect its citizens and the world economy for years to come.
After a decade of double-digit growth, mounting evidence indicates that China’s economy is slowing. How much slower is difficult to tell. China’s government has long been suspected of doctoring its economic statistics. What gets reported to the outside is probably a rosier picture than reality.
There is increasing evidence that the Chinese economy is faltering. Growing stockpiles of coal suggest slowing energy production. Less electricity production in turn portends less goods production and less slower economic growth.
And then there is the recent decision of China’s central bank to lower interest rates for the second time in recent months. With official data indicating slower but still robust economic growth, these moves surprised many outside observers. Did the bank lower rates to spur investment and stave off a larger slowdown than is evident in publicly available data?
Premier Wen Jiabao, in a rare public admission, recently warned of significant downward pressure on the Chinese economy. He tried to assuage public opinion, both in China and abroad, by suggesting that the economy was going to grow, just not as fast as many would like.
China also faces shifting political winds. A product of its own economic success, there is growing unrest on several fronts.
China’s one-child-policy, implemented to curb population growth, has unfairly hit many families. As incomes are rising, the wealthy are able to circumvent the rule, purchasing the right to larger families. They do this by simply paying the extra-child fine.
For those with low incomes, especially in rural areas, the fine is often a significant proportion of their annual income. Horrific stories of children being abducted by government officials and held until families pay the fine are not uncommon. Even worse, if the fine is not paid, these children become wards of the state and often disappear.
The desire for better living conditions rises with income. China’s economic advance has given rise to a growing environmental movement. Residents of Beijing endure pollution that foreign visitors find appalling. Protesters now appear at construction sites for new, pollution-producing mines and factories. Whether they halt such construction is beside the point. The fact that they are emboldened to even protest signals a change in attitudes.
Economic success often breeds desires for political freedom. This evolution will be tested when China’s Communist Party announces its decadal change in leadership. At the last change-over, party leadership embraced an expanded role for private enterprise. While an improvement, those who control the party still control the economy.
The Community Party under President Hu Jintao strengthened the state while markets made a toehold. Many more privately owned companies exist today than a decade ago. Major elements of the economy remain under party control, however. Continued party dominance, politically and economically, may not bring China’s expansion to a grinding halt, but it will impede future growth.
That is the prediction of Daron Acemoglu and James Robinson, economists at MIT and Harvard, respectively. They detail the history of economic success and failure across a wide swath of countries in their book "Why Nations Fail." The common denominator that most often predicts economic failure is the presence of extractive political institutions. Think of dictators or entrenched political regimes that enrich themselves and their cronies at the expense of their citizens.
Economic expropriation occurs because property rights are absent or, if they exist, ignored. Acemoglu and Robinson show that when the state controls ownership of production in major industries, competition from private-sector entrepreneurs is limited and continued economic expansion slows. The state also constricts labor mobility across space and employment, it regulates individual reproductive decisions, and it censors free speech. All of these describe undertakings by China’s government.
Continued improvement in the well-being of China’s citizens is in jeopardy unless there is radical change in the state’s control. Unfortunately for the citizens and the global economy, history predicts that China’s extractive Communist Party is unlikely to relinquish its hold.
R.W. Hafer is a professor of economics and finance at Southern Illinois University Edwardsville and a research fellow at the Show-Me Institute in St. Louis.