Big boulders block change

PUBLISHED : Tuesday, 06 March, 2012, 12:00am
UPDATED : Tuesday, 06 March, 2012, 12:00am


The World Bank's blockbuster 468-page report urging China to make wholesale economic reforms towards more freedom and a true market economy if it is to achieve its potential as an economic superpower simultaneously shows the great strength of China and the bank and their immense weaknesses.

It is strong because it is a careful and sustained analysis of the second-biggest economy in the world; it is weak because enormous political boulders stand in the way of change, and the political changes advocated would destroy powerful vested interests and transform the face of China forever.

I say 'World Bank report', but Robert Zoellick, the bank's president, went to great pains to underline that the report is a joint effort by the bank and the Development Research Centre of China's State Council, with premier-in-waiting Li Keqiang leading on the Chinese side.

Zoellick praised the 'unwavering commitment' of Li and quoted Vikram Nehru, the bank's team leader on the project, as saying that 'at the end of the day, both the Chinese and World Bank teams had truly become one joint team with common objectives and deep friendships.'

One intriguing question is who is giving cover to whom. The World Bank on its own, however eminent its economic analysis and advice, is not the power it was. As The Economist cruelly pointed out, 'China remains a big deal for the bank, but the bank is not a big deal for China ... The bank's outstanding loans (worth US$20.6 billion) are equivalent to only 0.6 per cent of China's foreign exchange reserves.' But China's reformers must be hoping that the World Bank's name will give critical catalytic leverage to the plea for reform.

The report is sugar-coated with heaps of praise for China's economic achievements since Deng Xiaoping opened its doors, evidence that there will be bitter and powerful resistance to the changes suggested. Even the title of the report, 'China 2030: Building a modern, harmonious, and creative high-income society', is full of feel-good buzzwords deflecting or hiding the tough political issues that lie in the way of change.

The hard facts are, as Zoellick and the report paint them, that China is heading for the economic Great Wall, known in other countries as the middle-income trap. The dirigiste model that has served China well for 30 years has reached its sell-by date.

The report has six strategic pillars:

Redefine the roles of the state and the private sector, so that China can complete its transition to a market economy.

Enhance innovation and adopt an open society with links to global research and development networks.

Promote green development.

Ensure equality of opportunity and basic social protection for all.

Strengthen the fiscal system and improve fiscal sustainability.

Ensure that China, as an international stakeholder, continues its integration with global markets.

Yes, there are echoes in the report of China's current five-year plan, but the plan is couched in the gentler social terms of tweaking and improving income inequality, environmental protection and energy efficiency - as if the existing growth momentum can carry China forward to solve its problems without too much pain.

This report faces head-on that China needs major structural reform, a changed role for government, itself subject to the rule of law, diminishing the role and power of the state-owned enterprises (SOEs) and increasing that of private enterprise, and releasing innovation, competition and entrepreneurship as the main thrusts of economic growth rather than relying on government.

The first point alone requires reform of the hukou residency permit system to allow workers to move more easily, greater protection for farmers' rights over agricultural land, and expansion of land registration and rental rights, all of which would cut into the powers of party officials and bosses. In addition, the government must step back from interfering in the market, while at the same time curbing the SOEs.

The blogger China Bystander called the report 'a political manifesto disguised as an economic blueprint' and pointed out that it gives influential backing for China's reformers to press on with reviving economic reform that 'has slowed to a glacial pace now that it has hit the hardest rocks of vested interest'.

The report does not suggest privatising the SOEs, probably seeing that would be a red rag to supporters of the old state capitalist regime and their powerful backers.

China's per capita income of US$8,400 (according to the CIA World Factbook) is still below the US$10,000-12,000 at which countries have traditionally encountered the middle-income trap.

But the slower growth target of 7.5 per cent announced by Premier Wen Jiabao in his report to the National People's Congress is evidence that the export- and investment-driven state-directed model of growth is encountering its contradictions.

Zoellick pointed out that China's road ahead will be tougher and the risks are that the population will grow old before it grows wealthy, since the labour force in five years' time will have more retirees than new entrants.

The changing of the political guard in Beijing is both a challenge and an opportunity, but there are no signs yet of a new Deng - either an individual or a group of leaders - who can lead China through the shadows of crisis to the sunlit uplands of a still developing middle-income country.


The amount by which China's per capita income falls short of the level at which growth in most economies has started to slow down