Wen Jiabao

No golden age, as Wen leaves a legacy of economic problems

PUBLISHED : Wednesday, 14 March, 2012, 12:00am
UPDATED : Wednesday, 14 March, 2012, 12:00am

It is a quirk of democracies that incoming governments end up reaping the economic harvest sowed by their predecessors.

In the United States, it was George Bush senior's 50 per cent reduction in defence spending relative to gross domestic product in the late 1980s that allowed Bill Clinton to balance the federal budget 10 years later, ushering in a long period of prosperity.

And it was the healthy fiscal position he inherited from Clinton that convinced George Bush junior he could cut taxes and ramp up government spending with impunity.

That profligacy fuelled an explosion in gross federal debt to around 100 per cent of GDP, and left Barack Obama a legacy that has poisoned his presidency.

There's a similar story in the United Kingdom, where the Labour governments of Tony Blair and Gordon Brown inherited a strong economy and robust public finances, only to leave their successors with an economy in crisis.

In contrast, the relative economic health enjoyed today by Dr Angela Merkel's Germany owes a lot to the unpopular labour market reforms introduced 10 years ago by previous chancellor, Gerhard Schroder.

Democracies, it seems, tend to change leaders just as the economic polices of the outgoing governments really begin to make themselves felt.

Things may not be so very different in China.

On the face of it, Wen Jiabao will have plenty of achievements to be proud of when he takes the stage today at his last annual press conference as premier.

In his nine years in office, China's electricity generation has tripled, its steel production has quadrupled and the number of cars and trucks manufactured each year has increased nearly sixfold.

Investment in infrastructure has soared and China's exports to the rest of the world have expanded six times over. As a result, national income has increased handsomely, with GDP per capita climbing by 140 per cent in real terms.

Yet although there is no questioning the magnitude of these achievements, it is doubtful how much of the credit can really be attributed to Wen or his government.

Wen's critics argue that China's rapid growth over the past 10 years was primarily the result of economic reforms instituted by his predecessor Zhu Rongji. They say Zhu's painful restructuring of China's bloated and inefficient state-companies restored profitability and paved the way for years of state-sector growth. Meanwhile China's entry into the World Trade Organisation, negotiated by Zhu's government, ignited an export boom that brought the country unprecedented wealth.

In contrast, Wen's leadership has been characterised by policy stasis. As the prosperity released by Zhu's reforms rolled in, liberalisation all but ground to a halt. Except for the abolition of China's hated agricultural tax in 2006, even enthusiasts find it hard to point to any meaningful economic reforms dating from the Wen era.

Instead, Wen's government has presided over an economy that, while expanding quickly, has become increasingly reliant on credit-fuelled investment to maintain its growth rate and which has become ever more unbalanced and unequal.

Last year, investment made up almost half of China's economic activity. That boom has made a small elite hugely wealthy, but for most people, earnings have failed to keep pace with GDP growth.

Despite significant wage increases in recent years, average incomes have declined relative to GDP per capita during Wen's time in government (see the chart above), and household spending has sunk to an anaemic 35 per cent of GDP.

Meanwhile, China's Gini co-efficient, a widely followed measure of income inequality, has shot up from a level similar to America's when Wen took over, to a level today closer to Swaziland's.

So although Wen's era might seem at first to have been an economic golden age for China, it is the previous leadership that deserves most of the credit for the country's growth story.

Meanwhile, Wen, by failing to press ahead with reform during his own time in office, is leaving behind him a legacy of economic problems that threaten to rebound viciously on his successors in government once he has retired.

It's what happens in democracies all the time.