Fault lines in China's economic terrain

Abstract

Fault Lines in China's Economic Terrain, by Charles Wolf, Jr., K. C. Yeh, Benjamin Zycher, Nicholas Eberstadt and Sung-Ho Lee. Santa Monica: RAND, 2003. xxvii + 207 pp. US$24.00 (paperback). In the almost three decades since Mao Zedong died, China's real per-capita income has grown five-fold, an average growth rate of approximately six per cent per year. Though impressive, this growth is not unprecedented. Both Japan (after 1950) and South Korea (after 1960) increased their average incomes at slightly faster rates for three decades or more, even though both began at higher income levels, according to available purchasing-power parity estimates. Like Japan and South Korea, a significant proportion of China's economic growth can be attributed to a high savings rate and an export orientation that has served to re-allocate resources towards areas of greater comparative advantage. Because of its large population, China has already begun to become a major player in the world economy, and if it sustains its current growth rate it could become the world's largest economy within the next two decades. Because it is still governed by a Communist Party, this rapid growth has created grave concern within both the US government and think tanks concerned with strategic and military issues, such as RAND's National Defense Research Institute. In this book, five authors associated with RAND look at the prospects for Chinese economic growth. Though they come from a variety of backgrounds and their collective scholarship is impressive, they have done little work on this specific topic prior to this book. Most of Charles Wolf's previous research has been related to US foreign policy. Benjamin Zycher has focused on military and strategic topics as well as domestic public finance. Nicholas Eberstadt has an extensive publication record in demographics, the effectiveness of foreign aid, and North Korea. Of the five, only K. C. Yeh has a significant number of academic publications focused specifically on China. Rather than explaining China's economic growth or discussing the potential effects of a strong China on US interests or the world economy, the book considers eight factors, or fault lines, which might derail its economy. The authors are clear that they are not trying to give a balanced view of China's growth prospects, but instead want to focus on what could go wrong. They explain this approach as an effort to provide an alternative to the glowing nature of much of the current literature, but it is not in fact clear that the academic literature lacks an appropriate balance in this regard. Still, such an approach may be very useful for US government policymakers. The eight fault lines they identify are, in order: (1) unemployment and poverty; (2) corruption; (3) epidemic diseases such as AIDS (the book was apparently written before SARS); (4) water shortages and pollution; (5) rising foreign energy prices; (6) a crisis in the banking sector; (7) a reduction in foreign direct investment; and (8) a military conflict over Taiwan. Of course, one could consider other possible fault lines. What about China's aging population, the long-term consequences of the one-child policy, the shortage of marriageable females, or other demographic problems? What would happen if countries such as the United States turned protectionist towards China's exports, or if China's real exchange rate were revalued either directly through a change in state policy or indirectly through inflation? But eight potential future difficulties are probably enough, and much can be learned by considering them. On the first of the factors (the potential for social unrest due to unemployment and poverty), while official urban unemployment rates are currently low, the authors use evidence of disguised unemployment and a massive rural surplus labor problem to estimate an unemployment rate of 23 per cent in 1999, and explain how this helps to create a potentially significant rise in labor unrest. …