Compare and contrast. This weekend, in Washington, President Barack Obama and his advisors will have been putting last-minute touches to a speech he is to make later this week about dealing with unemployment in the U.S. Their preoccupation would not have been with the long-term structural changes the U.S. economy needs but with the finer calculations of the politics of what can be got through a recalcitrant and divided U.S. Congress barely a year out from elections. Meanwhile, in Beijing, policy makers have spent the weekend in conclave with outside experts, including those from the World Bank, to consider what China’s economy will need to look like in 2030.
Writing in the Financial Times, Robert Zoellick, president of the World Bank, previewed that meeting and the ‘the big questions” China has to answer:
The drivers of China’s meteoric rise are waning: resources have largely shifted from agriculture to industry; as the labour force shrinks and the population ages, there are fewer workers to support retirees; productivity increases are declining, partly because the economy is exhausting gains from the transfer of basic production methods. Then there are other challenges, including serious environmental degradation; rising inequality; heavy use of energy and production of carbon; an underdeveloped service sector and an over-reliance on foreign markets.
While that is well known, including to the Party’s leaders, “without fundamental structural changes, China is in danger of becoming caught in a “middle income trap”. Zoellick says, adding that “China’s policymakers are well aware of “what” they need to do…Their challenge now is “how” to do it.”
A critical question is how China can complete its transition to a market economy. A broad agenda needs to include redefining the role of the government and the rule of law, expanding the private sector, promoting competition, and deepening reforms in the land, labour, and financial markets.
China has three five-year plans after the current one ends in 2015 to implement the how. Not that it will be easy or painless. Not only will those changes have to be navigated through the current leadership transition, they will also have to go through another one in a decade’s time. But the constant through that is the Party’s need to survive as China’s paramount ruler. There is no guarantee that China will be able to pull off the transition. While countries like Japan and South Korea have undergone a similar process of transformation from developing to developed economy, the political primacy of their governing institutions has not escaped unscathed. No country that has avoiding the middle income trap has yet done so without making its political institutions more transparent and accountable to it population.
As we noted before in a post on the middle-income trap, if the Party’s legitimacy to monopolistic rule depends on continuing to deliver the economic growth that keeps its citizens getting richer and it is right that China’s economic growth cannot continue beyond a certain point without institutional reform, then managing the role of government in the economy and overcoming state-owned vested interests — in other words reforming itself — becomes China’s policy planners most important concern.
America, too, is, arguably, a generation ahead in this process, trying to deal with what we could call the high income trap, trying to overcome the results of the profligacy that comes with the assumption that good times continue for ever, an assumption that has been brought up short by the current sluggish growth in the U.S. economy.
The lessons of the last two devastating economic downturns in the U.S. that preceded its current Great Recession — the Long Depression of the 1870s and the Great Depression of the 1930s — is that when prosperity returned it, first took a long time to come back and, second, looked different from what it was before. Both China and America should be looking at what their economy’s will need to be like in 15-20 years time. On the evidence of this weekend, only China seems to be doing so. Compare and contrast.