China’s Economic Failure

The Future of Shanghai. Will China's Economy Collapse?

In a recent Op-Ed article in the New York Times “Will China Stumble? Don’t Bet on It”, the author, Mr. Steven Rattner, feels optimistic that China will continue to serve as a world caterpillar for future economic growth. Lior Paritzky disagrees and attempts to refute Rattner’s claims.

Many in the west are optimistic about China’s economic growth. It seems that since China has demonstrated strong economic growth in the past 30 years, everyone expects China to rescue troubled Western economies. I believe things will not be that simple. Structured, cultural problems are closely related to China’s economic growth, and China is now at an economic turning point. Mr. Rattner feels optimistic that China will continue to show strong growth and bets on its success. I beg the differ.

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Primarily, Mr. Rattner bases his claim on the expectations that China’s gross domestic product will increase by 9.2 percent in 2011 and by 8.5 percent in 2012. In his analysis, Mr. Rattner does not consider the GDP per capita in China, which was approximately $7,600 in 2010 (According to the CIA World Factbook, China’s GDP per capita is ranked 100th in the world, after countries such as Peru or Belize)

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He also does not fully consider the influence of the rising income gap and its effects on China’s economic growth. In this article from Businessweek, the author recognizes the severity of the problem: “In the first half of 2010 per capita income rose 13 percent in the countryside, to $935 a year, and 10 percent in the cities, to $2,965 a year.” Yet the author goes to emphasize that “swelling slums in the suburbs of Beijing, Shanghai, and Guangzhou attest to a yawning wealth discrepancy between thousands of newly minted rich and millions of poor.” The problem is that the data do not reveal the entire truth. China’s income gap is perhaps much worse than official statistics indicate. “Undisclosed income, which could add up to $1.4 trillion annually, ranges from kickbacks to businesses or government to perks such as subsidized housing offered by state-run companies. If so, the wealthiest 10 percent of the population earned 65 times that of poorest 10 percent—not the 23 times shown by government data.”

Second, Mr. Rattner feels that “The country pulses with energy and success, a caldron of economic ambition larded with understandable self-confidence.” Obviously in his visit to China Mr. Rattner has not left any of the big cities. An hour drive away from Beijing or Shanghai, and one immediately forgets how advanced modern China is. In a country of 1.3 billion, even if 50 million are “pulsed with energy and success”, this is not to indicate that the entire country is so.

Third, Mr. Rattner states that “China has a plethora of tasks on its economic to do list, but none are impossibly daunting. Just as in the United States a century ago, jobs are needed for vast numbers of rural migrants moving into cities.” This is highly inaccurate. In an article I published on this blog, I wrote about the Ant Tribe problem – more than 6 million university graduates enter the work force each year, but only few find jobs. This is critical: It is not only rural migrant workers who need to find work in major cities; it is also the brightest students, whose parents have invested millions of RMB into their education, who are desperate for employment. If educated university graduates cannot find work, who will push China’s economic growth forward?

Fourth, Mr. Rattner identifies that “an opportunity lurks in China’s seeming inability to create innovative products with international identities.” This claim could have been true if China were to enforce intellectual property protection rules. As current conditions stand, it is difficult to see how China will continue its strong economic growth if it does not provide companies (foreign and local) with proper intellectual property protection. This has become essential in the 12th five year plan, which places a great deal of emphasis on China’s change from a manufacturing economy to an innovative, high technology one.

The list goes on and on. Aging population, severe environmental problems and high corruption levels are all very daunting signs that China’s economic growth is at risk. It almost seems that there is no reason to be optimistic. Through living in China (and forgive me Mr. Rattner, but a visit is not enough) I learned that struggling has been and will be an inevitable part of everyday life in a country that homes fifth of the world’s population. Up until now, China has surpassed immense challenges. Will it continue to do so in the future? Don’t bet on it.