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40 years of reform and opening up

40 years on, China dispels the myths of economic growth

  • Éloi Laurent says China’s economic miracle, the greatest development experiment in human history, defies the expectation that growth will reduce inequality, usher in political liberalism, and protect the environment
PUBLISHED : Friday, 28 December, 2018, 2:01am
UPDATED : Friday, 28 December, 2018, 10:44am

Forty years ago, on December 29, 1978, the 11th Central Committee of the Communist Party of China released the official communique from its third plenary session, launching the greatest economic-growth experiment in human history.

In newspeak understandable to Communist Party insiders, the country’s leaders, channelling the wishes of Deng Xiaoping, announced a series of unprecedented “modernisations” that would transform one of the world’s least-developed countries into a leading economic power. 

In 2014, China overtook the United States as the world’s largest economy (based on purchasing power parity). Its per capita gross domestic product, 40 times lower than that of the US in 1980, has grown by a factor of 58, and is now just 3.4 times lower (according to IMF data). In effect, around 15 per cent of humanity has experienced 10 per cent average income growth every year for four decades.

But China’s dizzying rise has also dispelled three leading myths about the impact of economic growth. The first is that growth reduces inequality and increases happiness.

In 1955, the economist Simon Kuznets hypothesised that income inequality would increase sharply and then decline – in the pattern of an inverted “U” or a bell – as countries underwent economic development. Given the pace of China’s economic growth since 1978, its experience refutes this claim more powerfully than any other case.

China, after all, is now one of the world’s most unequal countries. For the past 10 years, its Gini coefficient has hovered around 0.5, up from around 0.3 in 1980 (a coefficient of 1 means a single individual owns everything). In fact, the relationship between growth and inequality over time has followed a peculiar pattern: China’s Gini coefficient has increased with growth, and decreased when growth has slowed.

Moreover, according to data from the World Inequality Database, the share of China’s national income accruing to the richest 10 per cent increased from 27 per cent to 41 per cent between 1978 and 2015, and doubled for the top 1 per cent.

At the same time, the share of national income going to the poorest 50 per cent fell from 26 per cent to 14 per cent. This data is consistent with other sources showing that while per capita GDP grew by a factor of 14 between 1990 and 2010, the top fifth’s share of national income increased at the expense of the other four-fifths’ share.

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To be sure, these are relative inequalities, and China has undeniably reduced absolute poverty. Most Chinese once lived under conditions of high equality and high misery; today, they live in an unequal society where the income of the poorest 10 per cent grew by almost 65 per cent between 1980 and 2015.

Given such progress, one might think the Chinese have also grown happier. But the opposite seems to be true. In a chapter for the 2017 World Happiness Report, Richard A. Easterlin, Fei Wang and Shun Wang make a convincing case that while China’s GDP has skyrocketed, its citizens’ reported subjective well-being has declined, especially among poorer and older cohorts.

Even more surprising, though Chinese subjective well-being remains below its 1990 level, it actually ticked up over the past decade, when growth was slower than in the 1990-2005 period.

The second myth dispelled by China’s rapid growth is that economic liberalism eventually breeds political liberalism. Recall that in 1989, just months before Western liberal democracy appeared to have triumphed over Soviet communism, China crushed a student revolt in Tiananmen Square, killing some 10,000 of its own citizens, according to one estimate.

Since then, the country’s political trajectory has not changed. If anything, the Chinese state’s arbitrary and unfair exercise of power has become much more efficient.

Capitalism with Chinese characteristics implies the presence of a strong state in all areas of national life. While the technocracy facilitates economic expansion, the state’s massive security apparatus muzzles civil liberties and political rights.

Rather than becoming more democratic, China became a pioneer of the kind of authoritarian neoliberalism now seen in Turkey, Brazil, Hungary, India, and elsewhere.

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Lastly, economic growth can no longer be defended as the best environmental policy. In 2007, then-premier Wen Jiabao famously described China’s development model as “unstable, unbalanced, uncoordinated, and unsustainable”, owing not least to its deleterious ecological impact.

Still, the hope was always that economic growth would follow an “environmental Kuznets curve”, thus preventing or at least mitigating a full-scale disaster. It has not.

Recent data shows that China is now the largest extractor of natural resources in a global economy that is becoming ever more resource-intensive.

In 2010, China represented 14 per cent of global GDP, but consumed 17 per cent of all biomass, 29 per cent of fossil fuels, and 44 per cent of metal ores. Its domestic consumption of all natural resources now accounts for one-third of the global total, compared to just one-quarter for all developed countries.

Moreover, China now contributes 28 per cent of global carbon-dioxide emissions – twice as much as the US, three times more than the European Union, and four times more than India. Between 1978 and 2016, China’s annual carbon dioxide emissions grew from 1.5 billion tons to 10 billion tons, and from 1.8 tons to 7.2 tons in per capita terms, compared to the world average of 4.2 tons.

As is well documented, water, groundwater, and air pollution in China has reached a crisis point. And that, incidentally, also poses a problem for those who believe that capitalism is the key driver of environmental destruction. After all, the most ecologically unsustainable country in history is nominally communist.

At the Communist Party’s 19th national congress in October 2017, Chinese President Xi Jinping spoke of a fundamental contradiction between “unbalanced and inadequate development and the people’s ever-growing needs for a better life”.

China, he confirmed, was committed to the transition to “ecological civilisation” begun by the 13th five-year plan in 2016. Apparently, the greatest episode of economic growth in human history has ended.

Éloi Laurent is a senior research fellow at the Sciences Po Centre for Economic Research, professor at the School of Management and Innovation at Sciences Po, and visiting professor at Stanford University. Copyright: Project Syndicate