Is the Left right on China?

It is true, some of the charm’s worn off the Chinese miracle as it has become obvious the real miracle is not so much the economy’s productivity as it is the large amounts of capital virtually being thrown in to get growth. Indeed, as well-known China expert Nicholas Lardy pointed out at one of the various seminars organised by the NCAER as part of its Golden Jubilee celebrations, total factor productivity in China grew 3.8 per cent per annum in the 1978-93 period and this then fell to 2.7 per cent per annum in the 1994-2004 period. Even so, the sharp hike in its GDP growth (Chinese GDP grew four times in 1990-2003 while India’s grew just 1.9 times), the sharp reduction in poverty (6 per cent of China’s population is poor versus India’s 30 per cent or so), and its hire-and-fire model of export-oriented growth retain much of its allure even today.

Lardy’s talk at the NCAER was about the progress, or the lack of it, that China was making in its attempt to change its growth model enough to be driven more by domestic consumption than by investment growth, despite the fact that the central leadership favours this. One of the reasons why the central Chinese leadership wants this is that the productivity of investments is declining pretty rapidly and since much of this is being financed by loans from government-controlled banks, the financial system can once again come under a threat—over the past few years, the government has injected a whopping $500bn to help write off old bad loans. Second, employment growth has also fallen due to the hugely capital-intensive infrastructure development, from 2.5 per cent annually in 1978-1993 to just 1 per cent between 1993 and 2004. Third, the share of China’s GDP that is being consumed by households fell from 50 per cent in 1990 to around 40 per cent in 2003 and, according to Lardy, was around 38 per cent in 2005—in the UK, the consumption share was around 60 per cent and in India it was 61 per cent. Had China’s consumption proportion remained at the 1990 levels, personal consumption in China last year would have been 30 per cent higher than it actually was.

What’s interesting are the results you get when you marry these numbers with the distribution of population in both countries. At one level, the answer’s obvious since inequality levels in China are far higher than they are in India. According to the World Bank’s World Development Indicators (WDI), China’s Gini coefficient was 44.7 in 2001 versus India’s 32.5, so it is obvious the fruits of this development are a lot less evenly spread in China. According to the WDI, the bottom-most quintile of China’s population accounts for just 4.7 per cent of the country’s consumption—in India, the figure is 8.9 per cent. The quintile just above this consumes 9 per cent of the total consumption in China as compared to 12.3 per cent in India. The topmost quintile in China consumes half the country’s consumption versus a lower 43.3 per cent in the case of India.

Since China’s 2005 GDP was around $2.3 trillion, this means its consumption in that year was $847 bn. Divide that up into the various quintiles, and this means the population in the lowest quintile consumed just under $40 bn in that year; the next quintile consumed a little over $76 bn and so on, till the topmost quintile that consumed over $430 bn. Do the same exercise with India’s vastly lower GDP of a mere $785 bn (lower than even China’s consumption!), and you see that the bottom-most quintile consumed nearly $43 bn in that year! That is, the bottom fifth of India’s population is actually better off than the bottom fifth of China’s. Divide this consumption by the population in each quintile to take into account China’s larger numbers, and even the second quintile is only marginally better off than its Indian counterpart. Maybe India’s Left parties, which, while espousing the cause of China so dearly each time around and still refusing to buy into the Chinese growth model, are on to something after all.

The key here, obviously, is whether the distribution of each quintile is being described relative to the country’s income (in which case, China’s bottom-most quintile is a lot better off than India’s) or whether it’s relative to the consumption. The WDI, however, says very clearly that the data relate to expenditures and not income shares.

This is what the central leadership is trying to fix since, apart from the fact that greater consumption levels would help China move on to a more durable growth pattern and make it less dependent upon global demand, one presumes, at some point there is always the fear that the wretched of the earth may actually rise in revolt. Lardy’s view, however, is that things have only got worse with investment growing faster than GDP and the share of consumption falling even more in the first half of 2006.