Friday, November 30, 2012

China's Political Economic Structure Creates Inequality

By Tianlun Jian

Chinese people all like to talk about the economy, fear to discuss politics, fear to touch politics. I remember before I obtained my PhD in economics, I obtained a master's degree in political economy. My wife complained: you are studying in the Department of Economics, why do you get a degree prefixed with a "political" word, in front of the economics? At that time, I did not give more consideration. Just perfunctorily said: The school has only a master's degree.

Daron Acemoglu, Professor of Economics at the Massachusetts Institute of Technology and James Robinson, a political science professor at Harvard University jointly published a best-selling book in 2012, "Why Nations Fail."

This book analyzes the relationship between the political and economic institutions for many countries, ancient and modern, their histories, political institutions, economic institutions, and economic development and current status. The economy cannot be divorced from politics and exist independently. The book cited the lessons of the failure of many countries - exclusive political institutions and exclusive economist institutions. The book also mentions successful experience -- today's developed countries all adopt inclusive political institutions and inclusive economic institutions.

China's current macroeconomic policies all are set around the Chinese Communist regime. China's political system, economic structure, as well as their principles and policies are used to totally serve the interest Group of the CCP. So today's China has an exclusive political system, and an exclusive economic system.

One might ask, why in the past three decades, has China's economy grown so fast? It does not mean that with exclusive political institutions, the economy will no long have high growth rate.  Rather its economic growth cannot be sustained.

For example, before the 1970s, the Soviet Union also had three or four decades of high economic growth. Paul Samuelson, the world's most well-kwon economist who later won the Nobel Prize in Economics forecasted in 1961 that the Soviet Union’s GNP would exceed that of the United States as early as in 1984, or perhaps by as late as in 1997. In 1980, he still estimated the Soviet economy would overtake the United States, though the years were postponed the timing to as early as in 2002 and as late as in 2012. But it did not come true. As a matter of fact, the economy of the Soviet Union basically stagnated in the late 1970s, and only got worse in 1980s and 1990s.

Why Nations Fail also points out that current economic growth in China cannot be maintained. This is due to its political system. Unless China undergoes political reform, its growth cannot be maintained. The reason for China's higher growth in the past three decades than that of the Mao’s era, is that China went through some adjustment in its political institutions and undergone some economic reforms. The economic reforms adopted some capitalism ideas, and its economic institutions have become somewhat inclusive. But it still clings to the exclusive political and economic system, thus causing the polarization of Chinese society.

Why has the share of Chinese consumption in GDP decreased year by year? Because its macroeconomic policies are distorted, income distribution system is controlled by bigwigs who occupy a majority of the national income.

In essence, the high growth rates of China's exports and investment are developed by China's economic policies. And such policies have led to the decline in income share of the Chinese residents in GDP, year after year. For example, Chinese exports rely on the long-term rmb undervaluation. Such economic losses are born by the Chinese nationals. The high investment growth is built on the basis of low real interest rates.

In the nine years between 2003 and 2011, the average real deposit interest rates were almost zero, yet its GDP grew at double digit rates during the same period. This is an obvious example of mis-allocation of capital funds and mismatch between supply and demand. With a real rate on deposits almost close to zero, it means that after adjusted for inflation, Chinese depositors do not have any interest compensation for their money in the bank. From another perspective, that is to say, borrowers do not have to pay interest for borrowing money from the bank. So whoever could obtain money from the bank would gain, but who could obtain money from the bank?  State-owned enterprises, governments at all levels, and, in the past decade, land developers as well.

So, on the one hand, GDP has grown rapidly through exports and investment. On the other hand, majority of the Chinese people have not benefited much from the rapid growth. For many people, real income has not grown much. China's national savings has a strange phenomenon: on the one hand, the national savings rate is very high; on the other hand, a lot of people have very limited or no savings, therefore, they do not consume much.

It is worth noting that the high savings rate refers the overall savings rate in China, which is the average savings rate. So talking about China's high savings rate, it refers the national average savings rate. That is why nowadays Chinese people often say that they “are averaged.” In China, the very rich people save tons and tons of money. A popular jingle goes: Our village has a Billionaire Zhang, followed by nine paupers; when calculating the average, each becomes a Millionaire Zhang. This is a domestic popular jingle, a vivid description of the status quo of Chinese society.

According to the latest survey report of Chinese Family Financial Condition, about half of the Chinese people have only a very limited savings or no savings. If so, their income is only enough to purchase life necessities, and cover housing costs, health care, and education. It is impossible for luxury consumption. Maybe they have to choose the cheapest place to eat and live. In China, 75% of the savings comes from top 10% of the population. Then who are the rich in China? They are government officials, senior managers of big corporations, and real estate developers. These rich people, 10% of the population account for 75% of China’s savings, yet the poor, about 50% of the population have only limited or no savings. The serious condition of the uneven distribution of wealth in China is clear at a glance.

No matter how rich they are, consumption by the top 10% of the population is limited. And it is not possible for them to consume in proportion of their income. This is why Chinese consumption share in GDP has decreased year by year, in the past two decades, from 47% in 1990, down to only 34% in 2011. This situation is actually caused by exclusive political system and exclusive economic institutions.

With the exclusive economic institutions, the income distribution system serves for the Chinese Communist Party's exclusive political system.  As a result, Chinese national consumption share in GDP continues to decline. While it reaches the CCP’s goal of "let some people get rich first," at the same time it causes the polarization between rich and poor in the Chinese society.

When reproducing it, please make a reference to Chinese Economic Trends.