Long-term growth through structural reform in China : are the social, institutional, and regulatory foundations of the economy sufficient to support a transformation of household consumption?

Abstract

A stable economy with prospects for long-term, stable growth incorporates sound economic and social policies, supported by adequate regulatory supervision, well-functioning institutions, and a committed government as its foundation. Under this aegis, a developing country may ensure lasting prosperity by delivering increased growth in consumer spending, allowing consumption to become the primary economic driver. An economic model that overly relies on exports and investment will eventually become woefully unbalanced. Consumption based economies are less affected by external trade-related factors such as the economic health of its trading partners and offer some protection from societal and demographic changes as the economy evolves. The People’s Republic of China began to attract interest in its underdeveloped economy and potential for growth following its gradual economic ‘opening up’ and the launch of reforms during the mid-nineteen eighties. Over time, as China’s economy grew and surpassed its neighbours, China’s steady rise appeared inevitable and its eventual eclipsing of the world’s most developed economies seemed near certain, only some major obstacles remain. For more than three decades, China exhibited extended periods of robust economic growth, attributed in large measure to reforms covering all aspects of its socialist economy, institutions, and regulatory frameworks. This paper examines the current Chinese economic model and the numerous reforms and their implementation to determine their effects, long-term viability and sustainability, as well as whether increasing household consumption, the basis for a strong and independent economy, is possible or will require further reform. Economic reform through liberalization, designed to increase the nation’s wealth and raise per-capita incomes, while also keeping power centralized in the Communist Party has been the principal strategy since the beginning. China’s pursuit of its ultimate goal of long-term development and rapid and stable growth allowed its citizens to experience the benefits from the reform process very quickly. Still its economy is also highly unbalanced, being heavily reliant on exports, investment and credit, instead of a more suitable emphasis on domestic consumption. This is undeniably an unsustainable growth model, and the finite nature of the model is particularly incompatible for China, not only because of sheer size and population, but also due to a host of socio-economic issues, whose effects have yet to be fully confronted. The Chinese government has declared on numerous occasions that it intends to reform and rebalance the economy, with consumption as the primary driver, but the anticipated reforms and consequential changes have yet to emerge. The consumption patterns that developed in many Western countries such as the United States, where consumption is the main economic driver, are the result of decades of social, regulatory and economic development, which required years to materialize. Increasing consumption is not only a pressing issue for China, but it also has become one of economic and political survival. As an enduring consequence of the global financial crisis, Western nations mired in debt and slower growth were importing fewer goods from Asia. Therefore, export growth in Asian economies is not likely to return to previous levels, which will eventually drastically reduce growth rates in countries dependent on them. Yet, amongst China’s trading partners, imbalances have unexpectedly increased, causing trade frictions and calls for action. In this scenario, the consumer is the only saviour, but without the necessary support, the consumer will be unable to thrive. China furthermore faces numerous challenges besides slower economic growth. Issues related to demographics, debt, social welfare, labour laws, trade unions, and individual legal protections can also be directly linked to household consumption patterns and therefore deserve attention. However, the reforms needed to cure these deficiencies are not all economic, but instead lie in the manner in which governments administer the economy through policy, regulation, and institutional reform. The clues to understanding issues and development patterns and applying reforms that will allow for sustainable long-term growth will not only be found in successful Western and Asian economies, but may also necessitate the dissection of the many sources of the successes and failures in China’s past. Without a stable economic foundation and the social services, government support, and legal protections required to provide citizens a real sense of security about their economic future – discouraging them to save and encouraging them to spend more - there will be even more challenging times ahead.