Four economists offered radically different assessments of China's economy and forecasts for the future for the soon-to-be member of the World Trade Organization in last week's Stratton Lecture on Critical Issues, "China as the World's Biggest Economy?"
Lester Thurow, the Jerome and Dorothy Lemelson Professor of Management and Economics, didn't claim to know the state of China's economy, but insisted the numbers reported by the Chinese government can't possibly be accurate and can't come from a market economy.
After 20 years of 10 percent annual inflation, the inflation rate in China dropped in 1997 and has held at about 1 percent since.
"How can that happen? Recession. But China claims not to have had a recession. It claims an 8 percent growth rate," said Thurow to the overflow crowd in Wong Auditorium. "In 1998 the rest of Asia had a recession.
"For four straight years, the [Chinese] economy has grown just a bit, just under 8 percent a year," he said. "How can it remain stable, rock-hard at 7.8 percent growth every year when exports are going down? How is that possible? It isn't possible.
"I don't think that anybody in Beijing is lying. The truth is they just don't know. They don't have the data structure to know," he said. Thurow described an economic reporting system that relied upon mayoral reports. "If you do a good job [as mayor], they make you mayor of a bigger town. And if you do a good job there, they make you mayor of a small city. And if you do a good job there, they make you mayor of a larger city ... Would you want to be the first mayor to send a letter to Beijing saying 'My economy is sinking?' That's the same as not having a career," he said.
QUESTIONING GROWTH RATE
Ezra Vogel, the Henry Ford II Professor of Social Sciences at Harvard University, challenged Thurow's assumptions. While agreeing that the growth rate can't be as high as China claims, Vogel said the overall growth still could be enormous. The sheer size of the economy as it transitions from a command-and-control to a free-market system could account for annual growth.
"The economies of the United States and Europe are no longer a good measuring stick for Asian economies. Take Korea instead, which grew at an astonishing rate," said Vogel, who added it's possible for inflation to drop quickly and dramatically even without a recession. The speed with which goods (such as televisions) are being produced in the last 20 years has produced incredible competition within China, he said. "When you have that kind of competition in prices, it's not unusual that prices go down," he said.
Vogel called Thurow's characterization of the bad economic reporting "slightly exaggerated" and described some of the primary problems China will confront in the next few years. For example, coastal areas are growing at a 40 percent rate while productivity in the countryside has stalled.
"There is no way that China, with its modest budget, can put money in that gap. The only thing they can do is what other nations have done: pull people from the countryside to inner factories or coastlands. And with 100 or 200 million people coming into the urban areas, they're going to have to do a lot of construction," said Vogel.
That can happen another way: by the urbanization of the countryside, claimed Yasheng Huang, an associate professor of business, government and international economy at Harvard Business School. "People don't have to move. They'll become city residents there. One day they are farmers and the next day they wake up as city folk," he said.
What effect will World Trade Organization membership have? "Hong Kong is deeply committed to capitalism, to the rule of law, to human rights," said Huang. "Shanghai is not. Without WTO, the Chinese economy is already well integrated into the world economy. The true significance of WTO is on the institutional side--laws, legal practice, regulatory practices. There will be an institutional convergence to capitalism and it will facilitate development of the private sector."
"Right now foreign companies are treated much better than the domestic private companies, though not state-owned enterprises. This will become so obvious that business people will demand equal treatment," said Huang. "In 1999, China amended the constitution to acknowledge private enterprise as a component of the Chinese economy. Foreign companies got that in 1982.
"Accepting WTO commitment is revolutionary and significant [for China]. Chinese have accepted WTO terms which are more liberal and more far-reaching than what other WTO members, such as India, have accepted," Huang said.
Huang and Edward Steinfeld, assistant professor of political science at MIT, agreed that China's banking problems pose a serious threat.
Steinfeld referred to the "desperately serious financial banking problems" and claimed that nonperforming loans are 25 percent of the Chinese GDP and rising. "Banks still loan to the same big state-owned enterprises as they always have. Banks will make loans even after an enterprise has been declared insolvent," he said.
Huang said nonperforming loans are 40 percent of banks' assets, an "alarming rate" that could trigger a financial crisis.
However, he expressed confidence about China's ability to succeed as a market economy. "I have confidence in the ability of the Chinese leadership to solve these problems," said Huang. "I believe privatization is actually going to be good for political stability."
A version of this article appeared in MIT Tech Talk on October 24, 2001.