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Governing a rich China is challenge of the next decade

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Chinese President Xi Jinping delivers his opening remarks to the members of Global chief executive committee during the round table summit at the Diaoyutai State Guesthouse in Beijing, China, 21 June 2018 (Photo: Reuters/Andy Wong).

In Brief

At any level of development in any country, but especially at upper middle incomes, growth momentum can be broken by adverse developments of several kinds.

Noting the risks to the continuation of strong growth, I said in an earlier book that marked 20 years of Chinese reform that it was more likely than not that ideas about policy, policy itself, institutions and the knowledge of Chinese people would evolve with the experience of rapid growth in ways that would sustain it.

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It is more likely than not, I wrote, that output would double and double again over the next two decades.

Economic growth in China would not end in national environmental catastrophe. Rising incomes would bring both the will and the economic capacity to do something about domestic environmental degeneration. China’s sustained, rapid growth would raise larger, global environmental issues, but not just for China.

What is most likely for the next decade?

The conventional economic threats to growth are less daunting now than at any of the first three decadal anniversaries.

The biggest risks for the decade ahead lie in the possibility of mismanagement by China and other major states of adjustment to China’s emergence as the world’s largest economy and, by many measures, its most powerful state.

The most recent data from the International Monetary Fund (IMF 2018) calculate China’s share of global GDP measured in purchasing power at 18.7 per cent, compared with 15.1 per cent for the United States. A reasonable assessment might suggest a differential between Chinese and US growth rates averaging near 3 percentage points from now through the 2020s. The realisation of such an outcome would take Chinese purchasing power to roughly double that of the United States by 2030.

For some purposes, especially related to influence in the international economy, conventional national accounts data converted at current exchange rates provide a more useful measure.

By this measure, the World Bank (2017) estimates that the US economy was two-thirds larger than that of China in 2016.

Purchasing power estimates of output systematically exceed national accounts calculations in developing countries for a good reason: wages are lower in the developing country, so domestic goods and services are valued less highly.

In China over the past 15 years, a substantial part of the difference between national accounts and purchasing power measures of GDP has disappeared. Purchasing power measures valued, on average, each unit of Chinese output five times higher than national accounts measures in the early 1990s. Today, purchasing power measures value each unit of Chinese output only two times higher.

The difference between purchasing power and national accounts measures will continue to shrink as Chinese wages increase more rapidly than GDP. There will be convergence towards the purchasing power measures as Chinese incomes converge towards the levels of the developed countries.

By the fifth decadal anniversary of China’s economic reform, the 3 percentage point differential between US and Chinese growth rates would see the Chinese economy about twice as large as the United States’ by purchasing power, and moving towards twice as large by national accounts data.

The rise of Chinese average incomes into the range of the developed countries takes us into unknown territory in relation to the capacity of established Chinese domestic political institutions to manage the stresses of structural change.

Virtually all of the one-seventh of humanity living in countries with high average incomes now live within competitive democratic political systems. Is this because there are powerful social forces requiring democratic political systems for effective management of high-income societies? Or is it a product of a particular history?

China’s social and economic change over the past four decades has led to many political changes, although not a fundamental change in the Leninist political superstructure. Indeed, there has been increased centralised concentration of authority over recent years.

Going forward, there will be argument across the world about whether government for the people is possible without representative government by the people. There will also be more searching questions asked about the quality of government delivered by competitive democratic political systems in the old developed countries.

Without careful structuring of the terms of competition, it is likely to lead to suspicion and disruption, causing a failure of international cooperation at a time when it is essential for global peace and development.

Domestic order, good government and sustained development in China and the competitive democracies alike require mutual acceptance of differences in political systems. They require acceptance in each country that others will seek to insulate their own political systems from external political interference across national borders. The outcomes from contests over political systems in each country will have to be determined by domestic processes within each.

Success in China and in the high-income countries as China moves towards the fifth decadal anniversary requires an explicit or implicit 21st-century grand understanding of these issues.

Ross Garnaut is Professorial Fellow at the University of Melbourne. This essay is abridged from his chapter in China’s 40 Years of Reform and Development 1978-2018, ANU Press, Canberra published last Friday. This article was originally published here in the Australian Financial Review on 19 July 2018.

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