On Monday, April 2nd, the William and Mary Confucius Institute hosted Andrew Walder, the Denise O’Leary and Kent Thiry Professor in the School of Humanities and Sciences at Stanford University, as the 2018 Distinguished Scholar Lecture speaker. Professor Walder is a political sociologist and specializes in the sources of conflict, stability, and change in communist regimes and their successor states. Delivering a lecture entitled “China’s Rise: Past, Present, and Future,” he looked at the causes of China’s economic boom and how it compared to other countries’ similar periods of growth, where the economy is now, and where it is likely to go.
Professor Walder began by comparing China’s economic growth since 1979 to other countries, including India, Vietnam, and the former USSR. While the growth is impressive, it is not unprecedented. China’s growth from 1980-2010 was extremely similar to that of Japan 1950-1980, Taiwan 1966-1996, and South Korea 1966-1996. In other words, these periods of high growth have happened before. What China did is implement a two-fold political economy: abandon the Soviet model and adopt a transitional economy, which moved the economy from centrally planned and state owned to private ownership, an openness to the world economy, and a focus on exports. The difference with China is that there was a more gradual and limited privatization of assets, no simultaneous political transition, and far better economic outcomes.
China’s GDP growth has been on a downward trend since 2007 and the resulting financial crisis. Some of this slowdown is due to unavoidable factors, such as the aging population and rising wages, but others are the result of institutional design. The weak corporate sector in China means that although the number of employees working in state enterprises has decreased, the enterprises themselves have maintained much of their power. They employ only 18% of the labor force, but they have 40% of industrial assets and contribute 35% of GDP. The government also maintains control over key sectors, such as telecommunications, power, and infrastructure. Although there are 118 Chinese companies in the Fortune 500, Professor Walder could only identify 10 of those that are private or could be considered private. Sustained growth will require a shift from high levels of investment to increased efficiency of investment, selling assets to private firms, and increasing competition between the public and private sectors. Essentially, China must remove the state-owned monopolies that exist, or at the very least force them to improve through competition with other firms.
The 2008 financial crisis halted these shakeups, as the country realized how dependent it was on exports. The government responded with a gigantic financial stimulus into the state sector, mostly in building infrastructure. However, it has prevented China from closing unprofitable state enterprises which have lower returns and are a drag on the economy. SOE profits have fallen despite this growth in assets, while private firms are becoming increasingly profitable. Chinese debt is quickly rising, with the vast majority of this debt being held by corporations. This is different from most other countries, which seem to be more balanced between corporate, government, and household debt.
Professor Walder presented three possible outcomes: optimistic, pessimistic, and agnostic. The optimistic view focuses on that the state has shown flexibility and a willingness to adapt and the single party system prevents gridlock. In addition, the infrastructure spending will center the world economy on China. The pessimistic view mentions that the government has actually been strengthening the state sector instead of downsizing it, and that the CCP treats growth rates as a political target. The agnostic view asks about the negative of a lower growth rate and why catching up is so important. Many parts of China have already reached very high income levels, including Tianjin, Beijing, Shanghai, Jiangsu, and Zhejiang. However, the worst case scenario is long-term economic stagnation and political instability.
Professor Walder’s lecture was very well received and audience members asked insightful questions. We are all very glad to have had the opportunity to benefit from his knowledge and insight.