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Wednesday, February 29, 2012

Prognosis for the Chinese Economy

At the end of February 2012, the World Bank released its “China 2030” report in Beijing. The bank’s president, Robert Zoellick, said that China’s economic growth model is unsustainable, so significant reforms are needed. The report projects growth down to five or six percent annually by 2030, down from the ten percent annual growth in the thirty years up to the issuance of the report. Given the nature of the reforms, the Chinese government officials have their work cut out for them.

For instance, the report calls for “further reforms of state enterprises,” including “separating ownership from management.” Even in the case of the private sector in the U.S., such a separation has been daunting, as CEO’s typically control their respective boards—even being chairman of the board. For state enterprises, management may blur into the government officials under whom the enterprises are run. Moreover, the public or state interest is typically more salient in state enterprises, so separating management from the ownership can raise problems of legitimacy and accountability. Furthermore, lacking an independent judiciary, China is not exactly the sort of system wherein the checks and balances of a separation of ownership and management could viably function. In other words, hierarchical accountability wherein a boss tells a subordinate what to do is more in keeping with the macro political economy of China.

Secondly, the report urges China to build several “world-class research universities.” Here again, the lack of an independent judiciary may make foreign scholars wary of living in China. On the plus side for China, strengthening research domestically may relieve the pressure to pirate technology from foreign companies (sharing technology is often a condition of foreign direct investment). More research done in China may result in relaxed FDI requirements and less industrial spying. The result could be higher economic growth rates both in the short term and beyond.

Lastly, the report urged more of a focus on environmental technology and more spending on social programs (ironic advice given to a communist country). Just months before the report, Beijing had agreed to make public the measurements of finer pollutants in the city (as the U.S. embassy had been publishing its own numbers there anyway). While environmental technology could make a dent, the ultimate problem for the Chinese concerning not just pollution, but economic sustainability as well, is the huge population—over a billion. Simply put, having more people means more must be consumed. Whether in terms of food or more cars on the road, the population itself may not be sustainable, especially as more of it has become densely-packed in urban centers. Ultimately, sustainability for our species has to do with whether we can limit ourselves, not just individually or even in our cities, but also as a species.

Bob Davis, “World Bank Chief Urges Reforms for Beijing,” The Wall Street Journal, February 27, 2012.