What are the High-Probability Challenges to Continued High Growth in China?

Wing Thye Woo
Wing Thye Woo Former Brookings Expert

May 22, 2007

The 6th Plenum of the 16th Central Committee of the Communist Party of China (CPC) concluded on October 11, 2006, with the commitment to establish a harmonious society by 2020. The obvious implication from this commitment is that the present major social, economic and political trends are not leading to a harmonious society or, at least, not leading to a harmonious society fast enough. Analytically, if the Chinese economy is depicted as a speeding car, then are three classes of failures that could result in a car crash: (1) hardware failure, (2) software failure, and (3) power supply failure.

A hardware failure refers to the breakdown of an economic mechanism, a development that is analogous to the collapse of the chassis of the car. Probable hardware failures are (1) a banking crisis that dislocates production economy-wide, and (2) a budget crisis that necessitates reductions in important infrastructure and social expenditure.

A software failure refers to a flaw in governance that creates frequent widespread social disorders that disrupt production economy-wide and discourage private investment. This situation is similar to a car crash that resulted from a fight among the people inside the speeding car. Probable software failures could come from (1) the present high-growth strategy creating so much inequality, and corruption that severe social unrest results; and (2) the state not being able to meet the rising social expectations about governance issues.

A power supply failure refers to the economy being unable to move forward because it hits either a natural limit or an externally-imposed limit, a situation that is akin to the car running out of gas or having its engine switched off because an outsider reached in and pulled out the ignition key. Examples of power supply failures are (1) an environmental collapse; and (2) a collapse in China’s exports because of a trade war.

My assessment is that the highest probability event in hardware failure is the weakening of China’s fiscal position; the highest probability event in software failure is social disorder, and the highest probability event in power supply failure is water shortage. And my ranking of the probability of these three specific negative events in descending order is social disorder caused by outmoded governance, water shortage as a result of inept environmental management, and fiscal crisis generated by the repeated recapitalization of the state banks and the rapid aging of the population.

Will China succeed in establishing a harmonious society and completing the overhaul of its economic system? My answer is a very cautious “yes”. I am optimistic because both Chinese society and government want the economy to continue its convergence to a modern private market economy. My considerable caution comes from (1) the new major reforms being technically difficult to implement (e.g. setting up social safety nets), and having few, if any, successful precedents in the world to draw upon (e.g. designing market-compatible environmental regulation); and (2) the possibility that the many potential losers from these major reforms could successfully organise to resist meaningful implementation of the reforms.

The research focus of this Seoul conference (for which this paper is written) is to assess the power of China. My answer is that the most important measure of how powerful China is today is the degree that enlightened self-interest determines public policymaking within the Chinese Communist Party.