The impressive enigma of China's 'economic miracle'

Orville Schell, Dean, School of Journalism, University of California, Berkeley, Project Syndicate

The People's Republic of China is a country in precarious transition from one political/economic system to another. Monumental contradictions abound. Indeed, probably no nation of global significance has more unresolved issues concerning its ruling principles and structures. But what really makes forecasting China's future so difficult is not only that recent developments have so often defied prediction, but that virtually opposite, if logical, scenarios are plausible.

China emerged over the past decade and a half as a paradigm of economic energy, determination, and progress. Few other areas in the world have been deemed an "economic miracle" for so long. Through thick and thin, China has managed to maintain impressively high economic growth rates.

In 1989, China rose from the ashes of the Tiananmen Square Massacre. In the early 1990s, it weathered the implosion of the Japanese economic miracle, and maintained a steady course through the Asian economic crisis later in the decade. In 2003, it came through the SARS epidemic with banners flying. Now it seems to have repelled U.S. efforts to force it into revaluing its currency.

Anyone who has visited China's large cities over the past few years must be impressed by the energy, pace, and scale of development. The sheer number of projects -- from highways, ports, railroads, and airports to skyscrapers, housing developments, telecom infrastructure, and industrial parks -- leaves even skeptics gasping in awe.

But behind the dazzling skylines and impressive statistics, another reality exists, one replete with unresolved problems and daunting numbers that suggests a far darker scenario. Consider the following:

China must create some 12-15 million new jobs annually just to keep up with population growth;

The government must deal with an estimated 270 million unemployed or underemployed people;

A "floating population" (dispossessed rural workers who have moved to the cities to find work) of between 100-150 million is growing by almost 5 percent annually, representing the largest migration in human history. These migrants exist with no job security, no long-term housing, and no health care;

800 million rural peasants have been largely left out of China's latest boom, creating rising, but frustrated, expectations;

China has no functioning pension system, and the cost of creating one is estimated in the hundreds of billions of dollars;

New stock markets are all too often little more than elite- manipulated casinos, leaving China without the capacity to form the kind of indigenous pools of investment capital needed to power its own development;

State banks must provide 98 percent of all financing for local companies. But, having been used to keep state-owned enterprises afloat for too long, the banks are essentially insolvent. Standard and Poor's estimates that it would cost around US$518 billion (40 percent of GDP) to clean up their non-performing loans.

Environmental degradation from rapid industrialization, overpopulation, and uncontrolled resource exploitation is extreme and, given the pressure to maintain high growth rates, very difficult to remedy;

Since 1998, the Chinese government has become increasingly reliant on ever larger bond issues for fiscal stimulus, pushing debt onto the next generation;

Estimates of the government's growing aggregate liabilities (bank debt, un-funded pension plans, bonded indebtedness for infrastructural projects, etc.) range from 70 percent to over 150 percent of GDP.

The government's ability to collect tax revenue remains weak, yielding less than the equivalent of 15 percent of GDP.

Fears of an investment bubble caused by uncontrolled, indiscriminate, and excessively exuberant investment and growth have led many experts to worry about a meltdown akin to that experienced by Silicon Valley in the late 1990s. These fears are compounded by the fact that China's Leninist one-party government, now almost completely dependent on its "economic miracle" for legitimacy, has shown few signs of implementing political reforms to complement economic reform.

So China's entire system is in a state of perilously balanced transition. And since every economy is cyclical in nature, even some of China's most ardent boosters are left to wonder what resources the Party and government will have to draw on, should growth rates drop, even to a respectable 3-4 percent.

What would the government rely on for legitimacy if unemployed workers begin agitating; if angry peasants begin to besiege local government office in large numbers; if factionalism incites a crisis in leadership; conflict erupts in the Taiwan Straits; or the global economy remains sluggish?

China may have seemed a "miracle" over the past decade. But good economic times rarely test a political system. The real test is a political system's ability to survive the inevitable cyclical downturns, political shocks or social upheavals that almost inevitably challenge a country, particularly developing ones.

Economists and political observers who are skeptical about the durability of China's "economic miracle" -- and there are many of them -- point to the country's sclerotic political system, its precarious economic institutions, the hazardous balance of hundreds of millions of marginal Chinese, and the economy's reliance on outside capital. They are right to wonder whether the "miracle" can continue to survive the kind of shocks that have rocked almost every other part of Asia to its foundations at one time or another over the last decade. China has weathered much, but its big test has yet to come.