At the end of May, the Wilson Center hosted a conference on China’s economic and political outlook under its new generation of leadership. J. Stapleton Roy, Director of the Kissinger Institute, moderated the discussion featuring Junhua Wu, Chief Senior Economist at the Japan Research Institute Ltd. and a Wilson Center Senior Scholar, as well as Kiyoyuki Seguchi from the Canon Institute for Global Studies. While each panelist presented their opinions primarily on the economic outlook of China, each highlighted different challenges and opportunities for China’s fifth generation of leaders.
Junhua Wu began her presentation by focusing on the short-term economic projections put forth by the Chinese government. Furthermore, she questioned the legitimacy of these numbers. However, instead of delving into these topics, she reversed course and stated that both topics were irrelevant (unless you are an investment banker, she said) and that long-term projections were of utmost importance. “China’s economy has gone through ‘hot’ and ‘cold’ cycles since 1979,” she stated. She followed this by presenting a graph that showed China’s economy has grown, on average, at a blistering pace of 9.8 percent for the past three decades. She argued that less attention should be focused on whether or not China’s economy has had a “soft landing” and more attention given to potential long-term structural changes contemplated by China’s new leaders.
Junhua posited, as many China watchers have, that China’s extremely high GDP growth rates are not exactly great for the country. She blamed the Chinese Communist Party for abusing the economic system in order to further tighten its political grip on the country. China’s nominal GDP has increased nearly 15-fold since reform. During that same period, government revenue has ballooned to 27 times its previous size, due to heavy taxes on state-owned enterprises and their monopolies over certain industries. The Chinese Communist Party, she contended, has had a vested interest in rapid growth. However, this rapid growth cannot propel China through the dreaded “middle-income trap.”
The middle-income trap occurs when poor countries, with cheap labor, begin to accumulate wealth from manufacturing. This results in the population becoming more affluent and higher standards of living and ultimately, increased wages. Inevitably, the country’s once-cheap labor resource disappears. According to moderator Roy, 90 percent of all developing countries cannot pass the middle-income trap. Chinese leaders hope to join the other 10 percent, but are already seeing manufacturers choose to move their product lines to cheaper markets in Latin America.
The first slide Kiyoyuki Seguchi, a former employee of the Bank of Japan for nearly three decades, presented contained a blueprint for China on how to avoid the middle-income trap. Seguchi’s blueprint consisted of six points, divided into two sections: marketization and democratization. His marketization plan included the typical call for privatization of state-owned enterprises, financial liberalization, etc. The democratization side included measures to reduce income equality, reducing corruption, etc. Both Seguchi and Junhua concluded that political reforms were necessary for China to maintain stable economic growth, but were both skeptical this would occur under the new leadership.
However, each recognized that their own assumption that China must become more democratic to maintain sustainable growth has been repeated by many for the past several decades. Against all expectations, the Chinese Communist Party has continued to hold onto the reins of power through several rounds of economic reforms. Ultimately, both Seguchi and Junhua wondered if democratic nations had a responsibility to act differently with a China that has an even more liberalized economy but perhaps has the same authoritarian government.
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Avoiding the Middle Income Trap in China
June 11, 2013
At the end of May, the Wilson Center hosted a conference on China’s economic and political outlook under its new generation of leadership. J. Stapleton Roy, Director of the Kissinger Institute, moderated the discussion featuring Junhua Wu, Chief Senior Economist at the Japan Research Institute Ltd. and a Wilson Center Senior Scholar, as well as Kiyoyuki Seguchi from the Canon Institute for Global Studies. While each panelist presented their opinions primarily on the economic outlook of China, each highlighted different challenges and opportunities for China’s fifth generation of leaders.
Junhua Wu began her presentation by focusing on the short-term economic projections put forth by the Chinese government. Furthermore, she questioned the legitimacy of these numbers. However, instead of delving into these topics, she reversed course and stated that both topics were irrelevant (unless you are an investment banker, she said) and that long-term projections were of utmost importance. “China’s economy has gone through ‘hot’ and ‘cold’ cycles since 1979,” she stated. She followed this by presenting a graph that showed China’s economy has grown, on average, at a blistering pace of 9.8 percent for the past three decades. She argued that less attention should be focused on whether or not China’s economy has had a “soft landing” and more attention given to potential long-term structural changes contemplated by China’s new leaders.
Junhua posited, as many China watchers have, that China’s extremely high GDP growth rates are not exactly great for the country. She blamed the Chinese Communist Party for abusing the economic system in order to further tighten its political grip on the country. China’s nominal GDP has increased nearly 15-fold since reform. During that same period, government revenue has ballooned to 27 times its previous size, due to heavy taxes on state-owned enterprises and their monopolies over certain industries. The Chinese Communist Party, she contended, has had a vested interest in rapid growth. However, this rapid growth cannot propel China through the dreaded “middle-income trap.”
The middle-income trap occurs when poor countries, with cheap labor, begin to accumulate wealth from manufacturing. This results in the population becoming more affluent and higher standards of living and ultimately, increased wages. Inevitably, the country’s once-cheap labor resource disappears. According to moderator Roy, 90 percent of all developing countries cannot pass the middle-income trap. Chinese leaders hope to join the other 10 percent, but are already seeing manufacturers choose to move their product lines to cheaper markets in Latin America.
The first slide Kiyoyuki Seguchi, a former employee of the Bank of Japan for nearly three decades, presented contained a blueprint for China on how to avoid the middle-income trap. Seguchi’s blueprint consisted of six points, divided into two sections: marketization and democratization. His marketization plan included the typical call for privatization of state-owned enterprises, financial liberalization, etc. The democratization side included measures to reduce income equality, reducing corruption, etc. Both Seguchi and Junhua concluded that political reforms were necessary for China to maintain stable economic growth, but were both skeptical this would occur under the new leadership.
However, each recognized that their own assumption that China must become more democratic to maintain sustainable growth has been repeated by many for the past several decades. Against all expectations, the Chinese Communist Party has continued to hold onto the reins of power through several rounds of economic reforms. Ultimately, both Seguchi and Junhua wondered if democratic nations had a responsibility to act differently with a China that has an even more liberalized economy but perhaps has the same authoritarian government.
