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PORTSIDE  April 2012, Week 1

PORTSIDE April 2012, Week 1

Subject:

China's Economy: The Frog & The Scorpion?

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Thu, 5 Apr 2012 20:42:36 -0400

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China's Economy: The Frog & The Scorpion?

Dispatches From the Edge

by Conn Hallinan

April 5, 2012

http://dispatchesfromtheedgeblog.wordpress.com/2012/04/05/china-the-frog-and-the-scorpion/ 

Behind the political crisis that saw the recent fall of
powerful Communist Party leader Bo Xiali is an internal
battle over how to handle China's slowing economy and
growing income disparity, while shifting from a cheap labor
export driven model to one built around internal
consumption. Since China is the second largest economy on
the planet--and likely to become the first in the next 20 to
30 years--getting it wrong could have serious consequences,
from Beijing to Brasilia, and from Washington to Mumbai.

China's current major economic challenges include a
dangerous housing bubble, indebted local governments, and a
widening wealth gap, problems replicated in most of the
major economies in the world. Worldwide capitalism--despite
China's self-description as "socialism with Chinese
characteristics"--is in the most severe crisis since the
great crash of the 1930s.

The question is: can any country make a system with serious
built in flaws function for all its people? While capitalism
was the first economic system to effectively harness the
productive capacity of humanity, it is also characterized by
periodic crises, vast inequities, and a self-destructive
profit motive that lays waste to everything from culture to
the environment.

Can capitalism be made to work without smashing up the
landscape? China has already made enormous strides in using
its version of the system to lift hundreds of millions of
people out of poverty and create the most dynamic economy on
the planet, no small accomplishment in an enormous country
with more than a billion people. Over the past 30 years,
China has gone from a poor, largely rural nation, to an
economic juggernaut that has tripled urban income and
increased life expectancy by six years.

But trying to make a system like capitalism work for all is
a little like playing whack-a-mole.

For instance, China's overbuilding has produced tens of
millions of empty apartments.  "If we blindly develop the
housing market [a] bubble will emerge in the sector. When it
bursts more than just the housing market will be affected,
it will weigh on the Chinese economy," said China's Premier,
Wen Jiabao. And, indeed, by controlling the banks--and thus
credit and financing--real estate prices have recently
fallen in most mainland cities.

But since 13 percent of China's Gross Domestic Product is
residential construction, a sharp drop in building will
produce unemployment at the very time that a new five-year
plan (2011-2015) projects downshifting the economy from a 9
percent growth rate to 7.5 percent.

What worries China's leaders is that one of capitalism's
engines of self-destruction--economic injustice and
inequality--is increasing.  According to Li Shu, an
economist at Beijing Normal University, from 1988 to 2007,
the average income of the top 12 percent went from 10 times
the bottom 10 percent, to 23 times the bottom 10 percent.
According to the Financial Times, it is estimated that
China's richest 1 percent control 40 to 60 percent of total
household wealth.

Wealth disparity and economic injustice have fueled
"incidents," ranging from industrial strikes to riots by
farmers over inadequate compensation for confiscated land.
Endemic local corruption feeds much of the anger.

The government is trying to address this issue by raising
taxes on the wealthy, lowering them on the poor, and
including more "poor" in a category that makes them eligible
for subsidies. Wen said last year that China aims to
"basically eradicate poverty by 2020." According to the
United Nations, some 245 million Chinese still live in
extreme poverty.

Beijing has also reined in the sale of land by local
municipalities. But since the major way that cities and
provinces generate money is through land sales, this has
made it difficult for local areas to pay off their debts,
maintain their infrastructures, and provide services.

Whack one mole, up pops another.

There is a growing willingness by the average Chinese
citizen to confront problems like pollution, corruption, and
even nuclear power. Part of the current debate in the
Communist Party leadership is over how to respond to such
increased political activity. Bo had a reputation as a
"populist" and campaigned against economic injustice and
corruption. But he was also opposed to revisiting the issue
of Tiananmen Square, where in 1989 the People's Liberation
Army fired on demonstrators.

Tiananmen has considerable relevance in the current
situation, since the main demands of the demonstrators were
not democracy but an end to corruption and high food prices.
It is no accident that, when food prices began rising two
years ago, the government moved to cut inflation from 6.5
percent to 3.2 percent this past February.

While the government generally responds to demonstrations
with crackdowns, that policy has somewhat moderated over the
past year. When farmers ran local leaders and Communist
Party officials out of the town of Wutan, the provincial
government sent in negotiators, not police. Anti-pollution
protests forced authorities to shut down several factories.
At the same time, the government has tightened its grip on
the Internet, still arrests people at will, and is not shy
about resorting to force.

It is clear the possibility of major political upheaval
worries the current leadership and explains why Premier Wen
recently called up the furies of the past. The current
economic growth is "unbalanced and unsustainable" he said.
"Without successful political structural reform, it is
impossible for us to fully institute economic structural
reform and the gain we made in this area may be lost," and
said that "such a historical tragedy as the Cultural
Revolution may happen again."

Changing course in a country like China is akin to turning
an aircraft carrier: start a long time in advance and give
yourself plenty of sea room. If China is to shift its
economy in the direction of its potentially huge home
market, it will have to improve the lives of its citizens.
Wages have gone up between 15 and 20 percent over the past
two years and are scheduled to rise another 15 percent.

But social services will also have to be improved. Health
care, once free, has become a major burden for many Chinese,
a problem the government will have to address.

There are some in the Chinese government whose definition of
"reform" is ending government involvement in the economy and
shifting to a wide-open free market system. It is not clear
that the bulk of China's people would support such a move.
All they have to do is look around them to the see the
wreckage such an economic model inflicts in other parts of
the world.

Can capitalism work without all the collateral damage? Karl
Marx, the system's great critic, thought it could not. Can
China figure out a way to overcome's system's flaws, or is
this the tale of the frog and the scorpion?

The scorpion asked the frog to ferry it across a river, but
the frog feared the scorpion would sting him. The scorpion
protested: "If I sting you, than I die as well." So the frog
put the scorpion on his back and began to swim. When he
reached mid-stream, the scorpion stung him. The dying frog
asked "Why?" and the scorpion replied, "Because it is my
nature."

Can China swim the scorpion across the river and avoid the
sting? Stay tuned.

[Conn M. Hallinan is a columnist for Foreign Policy In
Focus, "A Think Tank Without Walls," and an independent
journalist. He holds a PhD in Anthropology from the
University of California, Berkeley. He oversaw the
journalism program at the University of California at Santa
Cruz for 23 years, and won the UCSC Alumni Association's
Distinguished Teaching Award, as well as UCSC's Innovations
in Teaching Award, and Excellence in Teaching Award.  He was
also a college provost at UCSC, and retired in 2004. He is a
winner of a Project Censored "Real News Award," and lives in
Berkeley, California.]

You can read Conn Hallinan at
http://dispatchesfromtheedgeblog.wordpress.com/about/

==========

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