This commentary appeared in South China Morning Post on August 7, 2003.
Among the four so-called "economic miracles" of the past half century—Germany
after the second world war, Japan in the 1970s and 1980s, South Korea in the
1970s through to the mid-1990s, and China between 1980 and the present day—that
of China has been the most remarkable.
For example, China's average annual economic growth has been 8.6 per cent,
well in excess of the 5 per cent recorded by Japan in the 1970s and 1980s. If
China can sustain this, by 2025, its gross domestic product (GDP) would be only
a little below that of the United States, although its per capita product would
still be less than 15 per cent of that of the US. But there is an array of "fault
lines"—obstacles which could seriously hinder this rosy scenario. A RAND
study, Fault Lines in China's Economic Terrain,
focuses on eight potential threats that are considered especially serious. While
many have been confronted and adequately managed in the past, certain adverse
scenarios could seriously impede, if not reverse, China's buoyant economic performance.
These eight fault lines, together with rough estimates of how they might reduce
China's annual economic growth, are: first, unemployment, poverty and social
unrest. Total unemployment amounts to more than 20 per cent of the workforce,
or about 170 million people. This is largely due to population growth in the
1980s, privatisation and the downsizing of inefficient state-owned enterprises,
and the effects of China's efforts to comply with its World Trade Organisation
commitments. Rural poverty is accompanied by increased income inequality between
rural and urban areas, by rural-to-urban migration, rising urban unemployment
and social unrest. A worsening of these circumstances could cause a reduction
of between 0.3 and 0.8 per cent in China's annual growth during the coming decade.
Second, corruption. Pervasive corruption could set back growth by distorting
resource allocations. Were corrupt practices to worsen, China's position would
decline in the country indexes that link economic growth with the prevalence
of corruption. Such a shift could reduce the expected annual growth rate by
perhaps 0.5 per cent.
Third, HIV/AIDS and epidemic disease. It is estimated that between 600,000
and 1.3 million people are infected with HIV/AIDS, with an annual rate of increase
of between 20 and 30 per cent. Plausible projections of these trends would seriously
affect China's economic growth through the cost of treatment, and reductions
in productivity. "Intermediate" rather than "pessimistic" scenarios predict
annual deaths from HIV/AIDS of between 1.7 and 2.7 million in the second decade
of the 21st century. This could lead to annual reductions in GDP growth of between
1.8 and 2.2 per cent, up to 2015. The incidence of Sars and other epidemics
could further impede growth.
Fourth, water resources and pollution. China is beset by water distribution
problems. North China, with more than 33 per cent of its population, has only
7.5 per cent of naturally available water supplies. South China, typically,
has an abundance of supplies, sometimes accompanied by serious flooding. Pollution
discharges from industrial and other sources aggravate the shortage of water
for consumers and industry in the north. Growth will be significantly affected
by whether policymakers push for less efficient, capital-intensive water-transfer
projects from south to north, or opt for more efficient recycling, as well as
conservation, in the north. If economically inefficient policy decisions are
made, China's annual GDP growth would be reduced by 1.5 to 1.9 per cent in the
Fifth, energy consumption and prices. China has shifted from being a net exporter
of oil in the early 1990s to importing nearly half its oil, and nearly a fifth
of its natural gas supplies. The major risk posed for sustained growth in the
energy sector depends on oil and gas prices, rather than on the share of imports
in total energy consumption. A sharp increase, lasting a decade, would mean
a reduction in growth of between 1.2 and 1.4 per cent.
Sixth, fragility of the financial system and state-owned enterprises. The fragility
of China's state-dominated financial institutions is suggested by the high volume
of non-performing loans on the balance sheets of the four major state banks.
Estimates of total non-performing loans vary enormously, but they may amount
to more than 60 per cent of China's GDP. China could experience a panic bank
"run", large-scale capital flight, a significant reduction in savings and a
decline in capital formation. The ensuing financial crisis and credit squeeze
could lower annual GDP growth by at least 0.5 to 1 per cent.
Seventh, possible shrinkage of foreign direct investment (FDI). In the past
15 years, China has experienced a steadily rising volume of annual FDI, reaching
US$50 billion (HK$390 billion) last year, significantly boosting growth. Adverse
internal developments include possible future tension following the leadership
succession, the possibility of a financial crisis and the inconvertibility of
the yuan; external impedance might result from improvements in the investment
climate in Eastern Europe, Russia, Indonesia, India and other countries that
compete for foreign capital. A sustained reduction of US$10 billion a year in
FDI may result in a reduction in annual GDP growth of 0.6 to 1.6 per cent.
Finally, Taiwan and other potential conflicts. Although cross-strait relations
are currently relatively benign, it is conceivable that tensions might escalate
into conflict, with growth-inhibiting consequences for resource allocations,
exchange rates and equity markets. The bottom line could be a decline in annual
growth of between 1 and 1.3 per cent.
Were all these scenarios to occur, China's annual growth would be reduced by
between 7.4 and 10.7 per cent. While the probability of them all happening at
once is extremely low, the chance that none will occur is also low. And if one
scenario happens, it would become more likely that others would ensue as well.
For example, an internal financial crisis would very likely have a negative
impact on FDI, unemployment and corruption.
The ramifications of these eight fault lines are likely to extend into all
levels of Chinese society, government and party structure. To mitigate the ensuing
stresses will demand an enormous set of consultations, negotiations and transactions
among central and provincial governments, and the party apparatus—which
will probably preoccupy China's leaders in the next decade, predisposing them
to avoid external distractions.
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