China – Economic projections slightly cautious

The following article by John Ross which evaluates the economic projections of the recent Chinese Communist Party congress, appeared in Global Times on 12 November.

The central economic goal outlined in General Secretary of the CPC Central Committee Hu Jintao’s report to the 18th National Congress of the CPC is achieving a “moderately prosperous society”. This created discussion of whether this goal is realistic and in what time scale.

The answer given here is that it is entirely realistic and the timescale for achieving a moderately prosperous society is 15 years. However, before giving the detailed reasoning behind these answers, it is worth considering a more general issue.

Former Chinese leader Deng Xiaoping advised that China should “hide brilliance, cherish obscurity.” During China’s period of reform and opening up it has showed modesty regarding its economic achievements. For example, international comparisons show that China in the last 10 years achieved the fastest increase in GDP per capita ever witnessed by a major economy in human history and the fastest growth of consumption in any major country. It would require little ingenuity for a publicity campaign on this that would enhance China’s international soft power.

In one fundamental sense Deng’s advice was correct. In serious matters nothing is gained by boasting. China suffered huge damage, for example during the Great Leap Forward between 1959-1961, by setting unrealistic goals.

But while excessive modesty is a commendable virtue in a human being in economics underestimation can be as damaging as exaggeration. Neither optimism nor pessimism is virtuous in economic policy, only realism. How realistic, therefore, are the economic goals in the 18th National Party Congress Report?

The key target, from which all else flows, is doubling China’s GDP between 2010 and 2020. China’s economic growth was 9.3 percent in 2011, and will not be below 7.5 percent in 2012. Then 7 percent average annual growth until 2020 is necessary to achieve the goal in the  18th Party Congress Report.  This is well below China’s actual historical growth, and even below China’s 7.5 percent target growth rate for the current Five-Year Plan(2011-2015). It is a realistic, rather conservative, assumption.

A moderately prosperous society however relates to GDP per capita, not total GDP. Moderately prosperous society is a specifically Chinese term, but to make international comparisons an appropriate benchmark is the World Bank’s category of High Income Economy (HIE). Only 1.1 billion people, or 16 percent of the world’s population, currently live in such economies.

China’s current annual population growth is 0.5 percent and likely to fall. Using an unfavorable assumption that population growth remains at 0.5 percent then, with 7 percent GDP growth, by 2020 China’s annual GDP per capita will be $8,500. This is 69 percent of the level necessary to qualify as an HIE. With the same trends China will become an HIE in 2026.

Therefore the economic projections made in the 18th Party Congress Report are highly realistic, and even slightly cautious. By international standards the time frame for China becoming a moderately prosperous society is about 15 years.

Within China the consequences would be gigantic. The pattern of consumption and living standards would be transformed in terms of quality of housing, quality of household goods, cars, holidays, requirements for health care, culture and entertainment. The results for the world would also be dramatic, since China’s 1.3 billion population is larger than the entire 1.1 billion living in existing high income economies.

It is rather astonishing to read some critiques of current economic projections in China in the media or on  Weibo. For example a recent discussion argued it might take 40 years for China’s economy to become larger than the US, whereas the latest calculations by the OECD is this will occur in 2016. Equally, on the most realistic assumptions, China may become a high income economy in 12 and not 15 years.

If detailed criticism were to be made of the 18th Party Congress Report regarding economic policy it would therefore be that its projections are slightly conservative. But that is the correct way to formulate national policy.

This article originally appeared in Global Times where it can be seen here.