In 2002, the Chinese Communist Party (CCP) announced a goal of raising per capita income four-fold by 2020. Such growth would require a 7.2% increase in annual per capita income which translates to an 8% jump in GDP every year. There is considerable debate about whether this goal can be met. In Why China is Likely to Achieve its Growth Objectives , Robert Fogel believes that China will not only meet but also continue this growth rate for an additional ten years because of increases in education levels, continued transformation to a market economy, popular support due to sensitivity to public opinion and improved living conditions, and the promotion of increasing local autonomy in economic matters. He believes that the detractions facing China such as problems in banking and state-owned enterprises deserve merit. However, the Chinese have had these same problems, and they have not historically slowed China substantially. Furthermore, changing conditions should alleviate many of these problems.
The growth China is aiming for has not been uncommon in poor countries in Asia. From 1950 to 1970 Japan raised per capita income 8.4%. From 1960 to 1980 Singapore enjoyed growth of 7.4%. Between 1965 and 1985 South Korea grew 7.6%, and from 1980 to 2002, China raised individual income by 8.2%. Therefore, a growth rate of 7.2% annually, which seems beyond spectacular in more developed countries, is not beyond reach. The critics understand the history of spectacular growth in the region but believe that China will not be able to continue its success because of unresolved problems. The banking system is saddled with many nonperforming loans from the state-owned enterprises (SOE). Income disparities continue to grow between the coast and interior, high and low skilled workers, and rural and urban workers. Bottlenecks in infrastructure, the growing problem of pollution, and the adequacy of the water supply pose additional problems.
Despite these problems, Fogel is optimistic for many reasons. He believes that labor productivity will continue to grow quickly. Between 1978 and 2002, 69% of the growth in per capita income is attributed to enhancement of labor productivity. He believes this number should increase because of increased diffusion of practices from the developed countries and the fall of the SOE. The average technology in China is still below the level in developed countries. Agriculture, service, and industry still have room for substantial improvement. As China becomes more open, the best prevailing practices will enter. Also, he cites researchers that agree with China’s policy of that gradually phasing out SOE’s instead of a “big bang” approach of rapid conversion.
Fogel emphasizes that major growth will come from improvements in the education of the Chinese. Compared to other countries in Asia and Europe, China has a high level of participation in the primary levels of schooling but not the secondary (college) or tertiary levels. China has between 70% and 85% less per capita enrollment at the two higher levels compared to these other countries. However, the government is actively promoting higher education. In 1998 Jiang Zemin called for a massive increase in enrollments in higher education. Over the next four years enrollment in higher education increased by 165 percent (from 3.4 million to 9.0 million) and the number of students studying abroad also rose by 152 percent.
Citing research that finds that a college-educated worker is 3.1 more times productive and high school graduates are 1.8 times more productive than a ninth grade graduate, Fogel calculates how improvements in education should affect growth. He finds that labor enhancement should grow at 7.4% annually if the tertiary ratio rose from 6 to 25 in the next twenty years, which would place the tertiary level of education in China on par with the Western European nations in 1980. That level of labor augmentation should add 4.4% to the growth rate of labor productivity, and by itself would account for over 60% of the 2002 goal.Fogel also discusses how the current method used in measuring statistics like GDP and income severely underestimate growth because they do not take into account improvements in the quality of output. For example, despite the invention of antibiotics and modern surgery, an hour of a doctor’s time today is considered worth the same amount as a doctor fifty years ago. He cites research that says the official growth in GDP of 2% annually for the past century in the US should really be around 3.6%.
The implication is that the growth may be dramatically understated in China, more so than in the United States. One example is how changes in life expectancy affect growth. From 1950 to 2000, life expectancy at birth increased from 40.8 to 71.4 years. This is an increase of about 0.18 years of life expectancy annually. Studies of the value of a statistical life year find that the value of an additional year of life in China is about 3.5 times per capita income.
Therefore, the value of the unmeasured improvements in life expectancy alone are high enough to raise the rate of economic growth by about 60% in this period. Therefore, if the true growth of GDP between 2000 and 2040 becomes 13% instead of 8%, then the true size of the Chinese economy in 2040 will be about 6 times the size of the measured economy. Such dramatic changes in life expectancy did not occur in the US, so their omission there is not as critical. Of course, both the United States and China similarly neglect changes of quality in their measurements, so the relative ranking of the two economies is changed significantly.
Fogel also believes that some of the problems the detractors discuss aren’t as important as they think. One major problem is that banks have many bad loans with inefficient SOEs that aren’t being paid off. Fogel says that this problem is long-standing, and although these inefficient firms are a drag on the economy, China still had a growth rate of 8% the past twenty years. Also, as the economy becomes more market-based, the burdens of these firms will gradually diminish as they are phased out.
The government also recently restructured two of the four largest state-owned banks to bring their capital position up to international standards. Outside investors are now more willing to invest in China. Also the government has low debt (less than a fifth of GDP), which gives them the ability to pursue stabilization policies, including a rapid restructuring of the banking system, instead of a gradual policy of reform which it currently uses. Although there are disagreements about economic policy among the top leaders, the top leaders agree that China should continue to transform itself into a market economy. This transformation promises to eliminate inefficiencies and promote growth.
Critics also question the current government. Fogel agrees that a multi-party system is ideal but that their current system isn’t all that bad. Popular confidence in the regime is high as evidenced by 67% believing that their living conditions have improved in the past 20 years. The government is in touch with its citizens because it uses polling techniques and relies highly on government at the local level. The government even won the 2008 Olympics. There still is a long way to go, but Fogel believes China is on the right track and therefore will continue its explosive growth.