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The World Bank released a report earlier this year warning that China is at risk of falling into the “middle income trap” of much slower or stagnant growth unless it implements a sweeping economic reform agenda. The export- and investment-led industrializing model that has served China so well over the past decade will not perform as well over the next twenty years.  The viability of this model will be undermined by slowing export growth, a shrinking urban workforce, rising costs for energy, water, and other inputs, and overcapacity caused by years of overinvestment.   The 468-page report, “China 2030”, identifies a variety of reform areas that Beijing must focus on to promote  China’s long-term economic development and improve the odds that it will eventually attain high-income status.  These include reducing the role of government in the economy, reforming and restructuring state enterprises and banks, developing the private sector, promoting competition in the land, labor and financial markets, and accelerating the pace of innovation.

There are signs that Chinese leaders foresee these challenges and recognize the need for structural reform.  For several years Beijing has focused its economic planning on “rebalancing” the economy away from exports and investment toward household consumption.  Beijing has also strongly emphasized science and technology (S&T) as a new economic growth driver, devoting a larger share of its GDP to research and development than do other countries with similar income levels.   This might give China a  better chance of sustaining productivity growth even as the drivers underlying China’s rapid growth over the past two decades, such as cheap labor and technology catch-up, are eventually exhausted.

However,   some commentators both inside and outside of China argue that many of the proposed economic reforms have little chance of succeeding without deeper political and institutional reform.  Beijing’s policy process currently favors the entrenched economic elite, which benefits proportionately more from the current model of imbalanced growth.  Vested interests, particularly local governments and state-owned enterprises, oppose key elements of Chinese leaders’ economic reform agenda.  Furthermore, an expected decline in the growth of central-level revenues will likely undercut Beijing’s ability to compensate domestic constituencies on the losing end of any reforms.  To dilute the influence of these interests and create more momentum behind needed reforms, Beijing would need to broaden political participation in favor of lower-income citizens and make the policy process more open and transparent.

This suggests that China’s incoming leaders will increasingly be challenged to balance their desire to preserve the party’s monopoly on power against their interest in safeguarding China’s long-term economic development.  Depending on how Beijing manages these competing objectives, China might see a future in which it can no longer compete in low-wage industries but lacks the ability to move to higher value-added sectors, and the World Bank’s warning would become a reality.

Zachary Riskind is an analyst with the National Intelligence Council’s Strategic Futures Group.

Regionalism and Chinese Economic Growth

One topic that hasn’t received as much attention as it might is differential economic growth within China.  I’ve been perusing the First Quarter 2012 edition of the China Beige Book (http://www.chinabeigebook.com/), which offers a high-fidelity, comprehensive survey of current national, regional, and sectoral economic conditions in China.  It is based on original primary source sourced within and throughout the country.  What it reveals is some considerable differences in the economic climate between (and within) China’s various regions.  Shanghai, Jiangsu, and Zhejiang, for example, have experienced strong revenue growth this quarter as autos and IT have been doing well, but Shanghai also has the most firms with falling output.  In the northeast, by contrast, manufacturing is plodding, hurt by sluggish textile and capital goods demand, but many domestic and foreign companies are still investing. In China’s central region, growth is disappointing and manufacturing results are lackluster, but the region is attracting an impressive set of local and foreign firms seeking untapped markets and cheap local labor. Farmers are hopeful but worried about drought.

Such regional differences have heretofore taken a back seat to high levels of economic growth.  One wonders if they will feature more prominently in decision making as Chinese economic growth slows.

Our assumptions about the future security environment depend heavily on assumptions about the growth of the Chinese economy.  Not too long ago, the orthodox view was that China’s high rate of growth would continue into the future.  This view was particularly pronounced in the wake of the 2008-09 global recession.  More recently, there has been a growing body of evidence and opinion to the effect that the Chinese economy is slowing down.  This, in turn, could be the prelude to China assuming a more “normal” rate of growth, or even to a downturn in the Chinese economy.

It seems to me that each one of these scenarios has security implications, both positive and negative.  So which scenario is most likely?  And what are its implications?