Salvaging China's economy: Economic growth is meaningless if the society is ruined

As the Covid-19 pandemic continues to spread throughout the world, the magnitude of its economic impact remains unclear. However, evidence shows far greater devastation of the world economy than even the Great Depression in the 1930s.

The 1997 Asian Financial Crisis (AFC) and the 2008 Global Financial Crisis (GFC) were only partial crises in the financial and economic sectors, but the Covid-19 pandemic is a comprehensive crisis, an all-inclusive syndrome of crises of the economy, society, politics, governance and global order. If not effectively controlled, the pandemic will exacerbate the world's crises, cause panic in the society and greatly increase the risk of war. History has shown that epidemics and wars often go hand in hand.

To prevent this, the Western countries, in particular, have unveiled huge economic relief packages. The relief packages of Western capitalist countries generally demonstrate a strong socialist stance. In fact, the more typically capitalist a country is, such as the US and UK, the more socialist is its relief package. The continental European countries like Germany and France already exhibit strong socialist elements.

The US is the most typical in this regard. Much discussed in the US recently is the question of who will be blamed if the US economy collapses. The US Congress, the Treasury Department and the White House have pushed through the Coronavirus Aid, Relief, and Economic Security (CARES) Act to prevent massive bankruptcy of the US economy and enterprises, and devastation of the workforce and ordinary families as a result of the COVID-19 epidemic. As the severity of the epidemic increased, the relief budget skyrocketed from the original US$800 billion to US$2 trillion.

Although the Democrats and the Republicans had partisan arguments over this relief package, the debate has been very effective. The Democratic Party raised concerns about corporate profiteering and the opacity of mechanisms for the disbursement of funds. During the 2008 GFC, the economic stimuli by the US government turned out to be a situation where the government incurred public debt which impacted the country's economy and people's lives. Majority shareholders and executives of large corporations took advantage and benefited from it while the common people, who suffered the most, received the least support and endured the long-term consequences of the government's subsequent fiscal austerity.

To avoid benefiting the rich instead of the poor, the Democratic Party vehemently argued for incorporating restrictions in the bill. These include disallowing businesses to repurchase company stock, restricting executive compensations, and setting up bailout budget review to ensure the accountability and transparency in the provision of bailout funds by the Treasury Department. They are to prevent fuelling citizens' distrust and resentment towards the government over non-transparent bailouts. The CARES Act, passed by Congress, has been signed into law by President Trump, who had previously criticised the US for its socialist measures. This stimulus package includes a cheque of US$1,200 for every American adult, except for the high-income earners.

Without a doubt, the pandemic has hit the Chinese economy too. The lockdown of villages, communities, cities and provinces as well as the suspension of transport, have had a huge negative impact on the economy. These measures have been decisively implemented by the Chinese leadership, which puts the lives of ordinary people as its top priority. Unlike the US, there is no controversy over people's lives versus the economy in China. Regarded as a draconian measure by the West, the lockdown was implemented not only in Wuhan in Hubei province but also extended to other provinces. Although the epidemic was quickly brought under control, China's economic growth in the first quarter has basically been decimated with figures showing a 6.8% dip - the first time a negative number has been reported in decades.

It is thought that work will resume soon after the epidemic is brought under control, and that the economy will rebound strongly. However, the situation is not optimistic because several epidemic-related factors continue to severely affect economic activities.

First, as the epidemic has only been brought under control but not eradicated, the possibility of a second wave of outbreak is worrisome. The 1918 Spanish flu was controlled only after three waves. Until a vaccine is invented and produced, this uncertainty will persist.

Second, post-epidemic psychological recovery will take a long time and operating conditions will not immediately normalise.

Third, although work can resume in China, the demand from Europe and the US has decreased sharply or ceased. Since China is a manufacturing base, the assembly or processing companies, especially those in the Pearl River Delta and the Yangtze River Delta, are unable to resume production without orders from Europe and the US. Many have either gone out of business or indefinitely extended their closures.

Although China itself was not under grave threat during the 2008 GFC, the Chinese government decisively launched a 4 trillion RMB stimulus package that prevented the crisis from reaching China.

Will the Chinese government need a larger and more effective economic stimulus package, in view of the severity of the Covid-19 crisis? Until now, it has not unveiled such a stimulus, due perhaps to the lessons learnt. While the previous 4 trillion RMB stimulus package has worked, it has also caused a huge negative impact, exacerbating the structural weaknesses in domestic industries. The stimulus was injected into the state-owned enterprises (SOEs) but not the private sector. This has further strengthened the SOEs, which have dominated domestic industries at the expense of the private sector.

Furthermore, many SOEs made inroads into real estate and, together with the private sector, drove China's real estate industry to its unprecedented high. Consequently, real estate prices in China have remained sky-high. As China has still not come to terms with these problems, the government is understandably conservative and cautious.

As the second largest economy, China is now more capable of salvaging its economy and the Chinese government may have a stronger will to do so than any other government. The problem, however, is more complex. While China has the financial wherewithal, it lacks good thinking on the utilisation of its finances.

Governments and mainstream scholars have regarded the Chinese economic policies as the diametric opposite of those of the West. The capitalist West has taken a socialist course while socialist China has pursued a market solution. The earlier Chinese economic stimulus package, which focused on capitalist and market measures, has hardly any socialist element.

This may be attributed to neoliberalism since the 1980s, when it played an important role in the early transition of China's planned economy to market economy. Deeply entrenched, neoliberalism has heavily influenced Chinese thinking and decision-making, resulting in "GDPism" (an obsession with GDP), where GDP drives all economic activities in an economy that is itself an independent unit. In the current discourse on economic policies, GDPism is evident in the following three areas.

First, should cash be directly distributed to the people?

If Western capitalist countries have already directly distributed cash to the people, why not China? There are voices in support of cash distribution in socialist China, but these are a minority. Mainstream economists, with GDP in mind, advocate consumer voucher distribution instead because consumer vouchers stimulate consumption and activate transactions to generate GDP. Consumer vouchers must be used by an expiry date, unlike cash which may be deposited in the bank. Hence, consumer voucher distribution is preferred over cash distribution to ensure consumption to generate GDP.

This is capitalist logic and not societal logic. Many agree that today, and perhaps in a long time to come, China's economy will no longer be focused on GDP but be a living or sustainable economy. As the majority in the Chinese society remain poor and are the most affected by the Covid-19 epidemic, there are compelling reasons to directly distribute cash. The enterprises that have been very vocal in seeking assistance in the public opinion circles in China are those that still manage to survive. The truly needy enterprises, families and individuals are unfortunately unable to voice their cries for help in their struggle for survival.

While cash distribution does not immediately generate GDP, it stabilises the society. With some cash to put away, people in the bottom strata of society will worry less about tomorrow. Frugality creates a sense of stability. A stable bottom 40% of the society will bring about overall social stability, and development will ensue regardless of its pace. However, although consumer voucher distribution may generate GDP, the forced consumption is more likely to cause social panic. Therefore, advocating consumer voucher distribution suggests either a lack of understanding of the bottom strata of the Chinese society or a fixation with GDPism.

Second, can the free flow of the factors of production promote GDP growth?

The basic principle of economics is that the free flow of the factors of production promotes economic growth. However, several important questions should be addressed. Firstly, while it promotes economic growth in the long run, it fails to solve the immediate problem of rescuing the society from a crisis. Secondly, and more importantly, how should the factors of production flow? There is little confidence in this because the economy was salvaged at the expense of the society in previous crises.

In China, in the aftermath of the 1998 AFC, GDP growth was ensured through the commercialisation of tertiary education. The 2008 GFC resulted in a booming real estate industry in China, in which wealth was rapidly amassed. The commercialisation of tertiary education and real estate, together with the previous commercialisation of medical care, have led to the current situation in Chinese society. Strictly speaking, these are social rather than economic sectors, and require massive investments by the state. As a result of their commercialisation, instead of receiving state investments, the society suffers from a lack of an institutional foundation that forms the basis of social stability.

If economic growth was to be promoted through the free flow of the factors of production, the social sector that will now be sacrificed is plausibly rural land. Land is the basic guarantee for the hundreds of millions of Chinese farmers. All interested parties, especially capitalists and local governments, have always been eyeing rural land as potential wealth. Over the years, discussions on the conversion of rural homestead land to urban land have centred on balancing rural-urban development. So far, land conversion has only been from rural to urban.

As soon as the farmers become financially well-off, they purchase houses in the city and send their children to city schools. They desert their rural homesteads and move to the cities. With limited government investment in the vast rural areas, sustainable development is extremely difficult. An effective way to balance rural-urban development is to allow urban residents to build houses and live in rural areas, and subsequently establish the essential services. However, the flow of land as a factor of production entails a large-scale land conversion that includes the decentralisation and delegation of land held by the central government to the provincial government.

The outcome of this policy is predictable. The local officials are interested only in the GDP generated by the land but not the population living on it. The farmers' loss of land or the country's massive loss of agricultural land will result in irreparable damage. In recent years, the household registration (户口 hukou) system has been relaxed, but to the farmers who have moved to live in the cities, it is mostly meaningless and just a hukou booklet on paper.

Central to the household registration system in the cities is the social system, but nobody pays attention to it. The radical changes in land management transfer the underlying problems from the rural areas to the cities. With inadequate social security in the cities, the political forces generated by such grassroots problems are much more powerful than in the rural areas.

Third, can the development of new infrastructure save the economy?

Lately, new infrastructure projects have become a hot topic. Traditional infrastructure includes high-speed rail, harbours, airports and highways projects, whereas new infrastructure refers to technologies such as 5G networks, especially projects involving A (artificial intelligence), B (blockchain), C (cloud computing) and D (big data). It is reported that the central government and 13 provinces and cities will respectively invest 3.5 trillion yuan and 34 trillion yuan in new infrastructure projects in the next few years.

The importance of these technologies to the future economy is beyond doubt. However, can investing in these areas support the growth of the second largest economy? Some observers have suggested that the new infrastructure projects cannot achieve the goals set by the GDPists, so they advocate the expansion and upgrading of traditional infrastructure in addition to increased investments in new infrastructure. It should be noted, though, that traditional infrastructure is already adequate or even excessive in most areas in China. Furthermore, overemphasis on new infrastructure may lead to technological utopianism.

Every country wants technological progress, which does not come easily. No one knows when new technologies appear, and huge investments in technology may not necessarily lead to technological innovations. As the contribution to economic growth by investments in technology can only be ascertained on a long-term basis, its ability to alleviate the economic crisis caused by the Covid-19 epidemic must not be overstated.

In fact, China's current economic development already requires its population to think beyond the old GDPism. This new thinking may be called "soft infrastructure", which is intended to provide the various public services and protect the society through the development of social institutions. Building upon poverty alleviation, the middle class can further expand and strengthen, which will, in turn, provide the basis for technological innovation and economic growth. Considering new infrastructure within the context of soft infrastructure will lend greater clarity to its significance to the economy and society.

The economy is driven by society. The most rapid of economic growth is meaningless if the society is ruined. Economic development motivated by GDPism usually puts the cart before the bullock, ruining the society in the process. The resultant economic growth will be unsustainable and will cause major social crises.

Related: China's yet-to-be-announced stimulus package: Dispensing the right dose | Without cash payouts, are China's Covid-19 economic measures enough? | The Great Lockdown: How to ensure a speedy recovery?