Is China Socialist? By Barry Naughton, Journal of Economic Perspectives, Winter 2017 Introduction A socialist system should be judged on four

Transcription

1 Is China Socialist? By Barry Naughton, Journal of Economic Perspectives, Winter 2017 Introduction A socialist system should be judged on four criteria: Capacity to shape economic outcomes by controlling a sufficiently large share of the economy s resources. Intention to get outcomes different from what would be obtained if market forces were left unchecked. Redistribution of income to benefit the poor. Responsiveness to the changing preferences of the population. In the late 1990s, Deng Xiaoping decided to break free from the Maoist ideology. By the late 1990s, China was moving decisively towards a market economy. Social service provision collapsed in the rural areas, inequality rose sharply and privatization enriched a small group of people. China today is quite different from the command economy of 40 years ago and the Wild West capitalism of 20 years ago. While the market does play a big role, the government in China has a much bigger influence on the economy than in virtually any other middle income or developed country. This article examines the relationship between China s government and the economy and how much socialist the government is. Capacity The Chinese government controls an unusually large proportion of national income streams, which have also grown dramatically as a share of the GDP since the 1990s. Government revenues have four main components: Budgetary revenues, social insurance premia, land revenues and net income from state owned enterprises. Chinese taxes amounted to 21.8% of GDP in 2015, comparable to OECD countries. Social insurance contribution was 6.8% of GDP in 2015, lower than the OECD average, but high for a middle-income country. At 28.6% of GDP, tax revenues and social insurance premia combined are quite high for a middleincome economy. China s social security revenues are consistently above the expenditures. Compared to OECD countries, the social security system is well funded. All land in China is publicly owned. Commercial developers pay for lease development rights. SOEs generate good profits. In 2010, land revenues made

2 up 7.1% of GDP and after tax profits of SOEs 6.1% of GDP. In 2015, they together made up 9.5% of GDP. If we sum up all the components, the Chinese government controls about 38% of GDP. In other words, the Chinese government is large and well sourced and has the capacity to intervene in the economy. Since 1978, China has seen a great deal of liberalization and de-facto privatization. Since the 1990s, the government has become bigger, even as it has eased its control over many productive assets. There was a major downsizing of the state sector in the late 1990s, in which uncompetitive and loss making SOEs were sold off. When small scale firms and artisans are included, workers in state controlled enterprises made up only 12% of the total industrialized workforce in China s industry and agriculture have become remarkably private and market driven. However, the Chinese government has never officially endorsed privatization and in the Chinese constitution, state ownership is the primary way of development. Moreover, the government has retained substantial ownership in the capital-intensive sectors. State ownership is also widespread in the services sector. The government controls 85% of banking sector assets, the entire telecommunications and transport network and essentially all educational, scientific and technological services. While the Chinese government owns a relatively small share of overall productive assets, the assets that it owns often gives it a monopoly position or makes it strategically well positioned upstream in the production system. Government assets in China are about three times GDP and Net assets (after accounting for debt) are about 1.5 times GDP. The four primary government asset holdings are: land, assets in non-profit public service units, SOEs, state run banks and other financial enterprises. Compare this with the US government, which has non-financial assets worth about 34% of GDP (12% land, 22% structures, and equipment and intellectual property rights). While the Chinese government does not own the means of production, it still has a strong ownership position in the economy overall. In the late 1990s, the Chinese government suffered from the lack of capacity, with budgetary resources below the average of low income countries. Today, the Chinese government is wealthy and has the capacity to intervene strongly in the economy.

3 Intention The Chinese government has two distinctive mechanisms for driving and shaping development. There is a set of incentives for bureaucrats linked to GDP and fiscal revenue. There is also extensive planning- national, sectoral, and regional and project level. Good performance in meeting targets for GDP growth and fiscal revenues brings bureaucrats cash rewards and better promotion prospects. With increasing seniority, it is more difficult to get a promotion. So, incentives for performance become even stronger as bureaucrats reach that stage in their career, when it is up or out. Moreover, development incentives and personal interests can be aligned in many cases. Thus, land development and support for businesses can be ways to enrich cronies and relatives, while also leading to faster GDP growth Since 2009, China has been investing 48% of its GDP, a figure unmatched by any large economy. Some portion of China s extraordinary savings and investment efforts is clearly attributable to the energy officials bring into raising funds for local development projects. This has led to some unwanted consequences. Bulk of the land has been reserved for industrial and commercial development as a result of which prices of residential land have shot up. Within a few months of the onset of the global financial crisis of , China mobilized investment amounting to 10% of GDP. Local governments sprang into action to initiate infrastructure projects. State owned banks began to lend quickly to these projects. SOEs were pressed into service for implementing the projects. In 1978, China was a command economy with central plans that did not really produce results. Planning was largely abandoned over the next 20 years. By the late 1990s, China essentially had no long-range plans or industrial policies. Since the turn of the 21 st century, long range plans and industrial policies have made a comeback. China today has scores of national plans and hundreds of local plans. There is little evidence that planning by itself has been effective in shaping development. But planning is part of a complex system of institutions that overall seem to have fostered development and growth. Of course, there are also examples of successful programs that have been taken up outside the plans. China has the world s largest high-speed rail network. The network did not feature in the plans till 2016 by which time, 19,000 km had already been built.

4 Redistribution By growing at 7-8% per annum, China s per capita GDP in 2014 was 20 times what it was in The benefits of this rapid growth have been broad-based. There has certainly been an extraordinary improvement in the overall living standards. But China s efforts to improve the supply of public goods has met with only limited success. China s income inequality has also increased. The country s record in poverty alleviation since the start of economic reforms has been excellent. The reduction in absolute numbers of those living in poverty in China between 1981 and 2010 accounted for 95% of the total worldwide reduction in poverty. During , there were on an average about 260 million rural people below the poverty line. By 2011, the number had come down to 114 million and by 2015, to 56 million. China has targeted poor regions since 1986 for development. The strategy has been to provide fiscal support for local economic development, infrastructure, and food for work and subsidized loans. Agricultural and rural growth have been the main drivers of poverty alleviation in China, no government antipoverty programs. China is not a welfare state. Transfer payments are low. In the mid-1990s, China was doing almost nothing to redistribute income. Since then the social safety net in both urban and rural areas has been strengthened. Today, there are four different medial insurance and pension systems that between them cover nearly all Chinese citizens. But the actual flow of resources is still very small. In 2014, the budgetary outlay for education was 3.6% of GDP, for health 1.6%, public housing 0.8%. These are very low by international standards. Some 20 million urban dwellers and 50 million rural residents receive direct minimum payments. But these payments are low, typically less than $ 50 per month. China does not have an institutional framework for broader redistribution of income. Personal income tax is only 1.3% of GDP. Most entrepreneurial and investment incomes are outside the purview of income tax. So the scope for redistribution through progressive taxation is small. There is also a deep institutional divide between the rural and urban areas. Urban dwellers with permits have inherited the benefits of the old command economy system. Socials services for rural residents have improved significantly but their standard remains far below that enjoyed by the urban residents. China also stands on the brink of a rapid ageing process. In some localities, retirement ages are low. Contribution rates of current workers are already very

5 high. So, the government is taking a cautious stance when it comes to expansion of the retirement and social welfare programs. Redistribution in China is primarily focused on the comparatively well off urban population. Overall, the limited scope of redistribution efforts is clearly visible especially when compared with the extraordinary efforts to promote investment and growth. China s record with respect to the environment is below average. It is only in the last 7 years or so that serious measures have been taken to reduce the emission of air and water pollutants. China s environmental deterioration seems to be flattening out but there are only limited indications of significant improvement. Responsiveness China is like many other socialist systems which claim to speak for the interests of the masses but without really doing much for them. The Chinese Communist party is fairly elitist. The views of the party members are given more weightage compared to the common man. The enormous growth in the flow of revenues and the value of government assets and the return to profitability of SOEs has strengthened the government considerably. But the government has not used this strength for the benefit of the masses. This is reflected in the failure to redistribute income in a more equitable way, preference for huge capital investments over modest social spending, difficulties in moving away from investment to consumption and considerable delays in tackling environmental problems. Redistributive policies cannot be effectively implemented without fundamental reforms of the fiscal, financial and decision-making systems. But interest groups have been able to stall and deflect such reforms. Conclusion The Chinese government has the capacity and intention to shape outcomes. But when it comes to redistribution and responsiveness, the government s record is not so good. China is moving towards a version of socialism that is authoritarian and top down but with a market economy that is based primarily on private ownership. China cannot be called a socialist country without making greater progress in universal social security, income redistribution and amelioration of environmental problems. Achieving these objectives will require fundamental reforms. Policies will have to reflect the interests and preferences of a much broader population, than has been the case so far.