The Carnegie-Tsinghua Center for Global Policy recently hosted Yukon Huang, a senior associate of the Carnegie Endowment and the former World Bank country director for China, to discuss his new paper, Reinterpreting China’s Success Through the New Economic Geography. Carnegie’s Paul Haenle moderated.

Chinese Development Since Deng Xiaoping

China’s economy has been growing at a near double digit rate, never falling below 8 percent in the last two decades. The reforms of Deng Xiaoping in the 1990s were focused around three factors: density, distance and divisions.

  • Density: Prior to the 1980s, China followed a balance-orientated development path, allocating a similar share of government expenditures to the coastal, the central, and western provinces. Under Deng’s leadership, China moved to an unbalanced growth strategy that concentrated development and investment along the coast, where there was a high density of production and trade. Over the following years, investments in the coastal provinces rose to two-thirds of all public expenditures. This development was supported by the migration of some 140 million temporary workers to the coastal production centers.

  • Distance: This unbalanced growth path was supported by reducing the inflated export costs that resulted from the transportation costs of goods shipped from inland China. For example, 63 percent of the total transport cost of a container shipped from Chongqing to California came from getting the container to Shanghai; only a third of the transport cost came from moving the container from Shanghai to San Francisco.

  • Divisions: The reforms under Deng broke the traditional pattern of each province being a self-sustaining entity without having the benefits of specialization. As the internal markets became more concentrated and specialized, competition and, in turn, efficiency increased.

Investment and Exchange Rate

Current debates about China’s economic relations with the West, such as the tensions over the RMB exchange rate, are misguided, Huang said. He expressed concern that these debates might result in adopting economic solutions that could inadvertently harm both China and the West.

  • Exchange Rate: According to Huang, China remains unpersuaded by international efforts to force Beijing to appreciate its currency and limit exports. He explained that an appreciation of the RMB now could prove disastrous as exports would suffer, causing China’s contribution to regional and global demand to fall. Rather than focusing on appreciation the international community should press for the RMB to remain flexible – sometimes increasing in value and sometimes decreasing – while encouraging China to increase its imports.

  • Investment: China’s total investment ratio as a percent of GDP is three times that of the United States. The government encourages a countercyclical pattern of investment, increasing investment rates in times of crisis and lowering it in times of prosperity. As a result, Huang said, China is largely able to resist recessions and market downfalls. On the other hand, he  pointed that state enterprises with huge profits often invest their revenues in the wrong areas.  Since they are state-owned, about 30 percent of their revenue should go into the national budget, as opposed to the current 3-4 percent, Huang said.  This would provide more resources for social expenditures which would help moderate external imbalances.

  • Economic Relations with the West: The international community should be encouraging China to import more, Huang said; such a strategy  would benefit both China and the West. Similarly, China should invest more abroad as opposed to domestically; however, foreign investments by China have been constrained due to unfavorable laws in other countries that curb the opportunities for Chinese nationals and businesses to purchase assets.

Reducing Income Inequality

Income inequality is the biggest challenge facing China, Huang stated. Fortunately, the solutions to this problem, such as increasing population mobility or hastening urbanization, are not only effective, they also do not run counter to overall economic development. In the end, Huang predicted, the cost of labor in the coastal provinces will increase, which, along with the increased domestic demand for goods, will naturally force companies to move inland and begin creating more balanced development.

  • Allow Mobility: The best way to combat income inequality is to encourage people from rural areas to move into cities, Huang said. As a result, their incomes will go up, encouraging domestic consumption. As for the rural areas, their average income should increase as more property and agricultural land will be available to those who stay behind. According to Huang, the “hukou ” system has to be reformed and people in the countryside should have the opportunity to sell their land use rights. To further encourage mobility, China should ensure that its citizens’ pension schemes are mobile and the benefits remain the same whether the individual changes workplace or region.

  • Encourage Urbanization: The rate of urbanization in China now is only around 45 percent, Huang said, when it needs to be at least 60 percent. South Korea, a country with one of the lowest ratios of income inequality, has over a 25 year period moved 50 percent of its population from the countryside to cities.

Strategies for Other Countries

Huang also outlined several more general strategies of how economic growth can be encouraged.

  • Equality of Services: Political leaders trying to secure the benefits of unbalanced growth often face public resistance from the regions that would not directly benefit .  These are often remote areas with limited resources and market access and thus unattractive as production centers.   Huang suggested that the best solution is to ensure equal access to social services, such as education or healthcare, regardless of a region’s level of development. This would enable greater intra-state mobility as workers and families are provided with the skills to find jobs elsewhere and the ability to move without losing access to good health and education services.

  • Green Technology: Huang posited that China can benefit from the economies of scale needed to support green technologies. Such ventures can be made more palatable and economically stimulating in other countries as well, if the technology itself were patent-free and available worldwide.