The Mantra of Consumption-driven Growth and the New Urbanization Plan

April 2nd, 2014 by Doris Fischer, Würzburg

For years, China has been discussing the necessity to enter a new growth path. Originally, the discussion arose from economists’ warning that China’s growth will not be able to rely on cheap labour and exports endlessly as population growth slowed. The thrust of the argument at that time was that China had to shift to a more knowledge-based, innovation-driven development path or, in other words, should shift to higher stages on the global production chains. The warnings seemed increasingly plausible when wages rose in Southern China due to a lower flux of migrants and the impact of the new labour law of early 2008.

Later, representatives of the US government, amongst others, pressured China for supporting local demand as part of the global remedies against the global financial crisis and China’s huge trade surplus with the United States. China’s export-driven growth model was said to be unsustainable, as it contributed to global imbalances and exposed China to too much risk. Hence, China’s stimulus package, announced in late 2008 and implemented throughout 2009 and 2010, was lauded internationally. The stimulus package did trigger an investment boom, even though, as was to be expected then and has become obvious today, it created substantial follow-up problems. At any rate, the contribution of final consumption to GDP did not change significantly. As far as there was a tiny increase in final consumption to GDP this resulted from government consumption, not household consumption.

The discussion about a necessary change in China’s development path again gained traction in the months before the Chinese leadership change. This time the discussion expanded against the background of local government debts, declining profitability of state-owned enterprises, fluctuating exports and ever increasing environmental problems that were perceived as a result of the stimulus package and the investment-driven development path of the last decade. Different visions, hopes and interests led to the common expectation that the new Party leadership under Xi Jinping would initiate substantial changes in economic policies. In this context, China’s need for a new growth path again was linked to the idea of a consumption-led growth model. Triggering consumption at home would lessen export dependence, stabilize GDP growth etc.

Most recently the March session of the National People’s Congress has confirmed this line of thinking. For example, the recently propagated “2014-2020 new urbanization plan” states that “domestic demand is the basic force of our economic development and the largest potential for expansion of domestic demand lies in urbanization”.

So, it seems as if China’s future growth path is expected to be urbanization driven and therefore demand driven. Does this mean that the early experts who called for a new growth path can be happy because their warnings are finally understood? Can the US exult because finally the trade balance will tilt to their favour? And can the Chinese government look forward to a new growth impetus that helps overcome the problematic legacy of the stimulus package? I think it is too early to be that optimistic.

First, the remedy is not new. Last time the Chinese government grasped to an urbanization strategy for solving economic problems was at the end of the 1990s when the introduction of private ownership of housing led to a surge in urbanization, real-estate investment and – for about three years – an increase in the consumption to GDP ratio. While this indicates that the new industrialization strategy may indeed contribute to domestic consumption, the recipe as such would not be new and the impact may not last long.

Second, past experience is that public investment tends to increase in the years after a leadership change. Against this background, the urbanization programme can also be interpreted as an invitation to local government to invest in real estate programs, city and infrastructure development etc. It would still be a development path driven by investment. This may not be the intention of the central government but it is a likely outcome.

Third, the challenge remains to find occupation for the new urbanites. Where will they work? In the service sector or in labour-intensive production? We do not know, yet. Whatever the development will be, it will influence the growth path. Last but least, the vision of consumption-led growth still implies that the products for consumption have to be produced somewhere. This could be in China, it could be abroad. In any case, the problem of the environmental impact of global consumption pattern that has led to China’s environmental problems, will not be solved by China following a US like consumption-led growth model.

 

 

 

 

 

 

Doris Fischer
Professor, University of Würzburg, China Business and Economics

 

 

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