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China's disguised failure
Financial Times
Arthur Waldron
9/4/2002 2:58:00 AM

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The debate that is gaining steam over the accuracy of China's growth figures for the past few years is far more than a matter of technical quibbles among statisticians. Rather, it marks the beginning of a long-overdue reassessment of the successes and failures of Beijing's reform era - the widely praised attempt at growth and modernisation that began not long after Mao Zedong's
death in 1976.

Last year Thomas Rawski, the American economist, started the argument with the startling assertion that - official claims of economic growth rates of more than 7 per cent notwithstanding - China's economy since 1998 might not have been growing at all.

Then, in March, Zhu Rongji, China's premier, seemed to support him when he said that without massive state pump-priming, the Chinese economy would have collapsed in 1998 - the very year Mr Rawski singled out.

Other voices have joined the debate since. This year, for example, the Central Intelligence Agency stated that China was indeed growing - but at about half the rate that Chinese officials claimed. And the East-West Center in Hawaii reported recently that China's statistical methods were flawed.

Everywhere, it seems, China's economic indicators are being marked down, causing deep concern and confusion about the prospects for the world's most populous country. Are we feeling no more than a few bumps on China's still inevitable ascent to economic greatness? Or are these the first signals that fundamental flaws may exist in the Chinese approach?

To the visitor, economic vigour seems evident on every street corner. Scratch the surface, however, and you find unsold goods in the shops and unemployed people camping on the streets.

One lesson of the collapse of socialism in eastern Europe is that profitability, not quantity of investment, is the key to sustained economic growth. Here, arguably, lies China's fundamental problem. There is no doubt that massive investment is being made - more than $300bn in foreign direct investment in 20 years, and vastly bigger amounts by the state. All this shows up as growth because the sums are spent, the workers are hired and the cement is poured. But what about actual return in a decade or two? This is much less clear. And what opportunities are missed by having foreigners and the state in charge, rather than letting Chinese entrepreneurs do the job? These may be enormous.

Many foreigners think, mistakenly, that China is capitalist. In fact, China's system is exactly what its leaders call it: socialism with Chinese characteristics. In practice, that means a large state sector, party committees even in private enterprises, corporate boards that are unable to fire managers, no market for corporate control and massive changes in economic policy (such as consolidation of the motor industry) dictated without consultation.

Worse still, the system discourages private Chinese entrepreneurship - the only possible engine for long-term economic growth - while conferring privilege on foreigners. Indeed, it would be easier to start a business in China as a US citizen than it would be as an ordinary Chinese citizen.

Rather than unleash the well known and awesome creativity of private Chinese business, Beijing has substituted a superficially modern structure built on foundations that are still socialist. One part is foreign direct investment - the Taiwan- and Hong Kong-owned manufacturing around greater Hong Kong, for example, that piles up China's trade surpluses. Another part is the unprofitable state industrial sector, kept afloat by loans from state banks, which piles up irrecoverable debt. The third part is the impoverished countryside, with its limited links to the modern sector.

The central government's fiscal foundations are similarly questionable. Although already borrowing to pay its regular deficits, it has nevertheless signed up for some expensive projects: the Pudong development in Shanghai, the Olympics, the Three Gorges Dam, weapons acquisitions and a space programme, to name a few.

Living standards may be rising and production growing, but other things are rising, too: a mountain of debt, wasted capital and unfunded liabilities. These were created not under Mao Zedong but under his reforming successors. Nor does it seem likely that these problems are going to be tackled soon.

Since 1989, China has been trying hard to avoid the sorts of traumatic economic and political shocks that brought down communism in the west. The deep structural changes that have returned those former communist states to
health, however, are as inescapable for China as they were for Russia. Painful as those reforms were in the west, they will probably prove even more painful when they finally reach China. And all because of the errors and wasted opportunities of the misnamed reform era.

The writer is professor of international relations at the University of Pennsylvania and director of Asian studies at the American Enterprise Institute

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