If Only China Were More Like Japan

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Heavy bias toward the state-controlled sector reversed what had occurred during the first 10 years of reform (1979-1989) and was the direct result of the Chinese Communist Party having retaken control of the levers of economic power following the Tiananmen protests in 1989.

Asia's most-unequal income spread

Focusing on China's unmatched bias toward its state-controlled sector is not merely about the inefficient use of capital, although that is putting serious strains on the sustainability of its economic model. Since so much of the country's wealth is concentrated in approximately 120,000 SOEs (and their countless subsidiaries), a relatively small group of well-placed, well-connected insiders benefit, while opportunities to prosper are denied to the vast majority.

For example, household incomes have increased by around 2 percent to 3 percent a year since 2000, while the coffers of the state-controlled sector enjoyed double-digit increases. Despite impressive GDP growth, about 400 million people have seen their net incomes stagnate or decline over the past decade. According to official data, the number of illiterate Chinese adults increased, from 85 million in 2000, to 114 million in 2005. From 2001, a 2006 World Bank study indicates, the income of China's poorest 10 percent was declining by 2.4 percent every year, suggesting that absolute poverty increased when national GDP was growing by double digits every year. It is no wonder that within one generation, China has gone from being the most equal (albeit from a low base) to the most unequal country in Asia, in terms of income distribution, according to World Bank calculations.

The fact that the vast majority of Chinese have missed out on the fruits of economic growth has serious ramifications for social and ultimately, political stability. Instances of mass unrest—124,000 in 2008 according to official figures—are increasing at more than twice the pace of GDP growth. Beijing now spends more on internal security than it does on the People's Liberation Army. By the CCP's own calculations, the country needs 8 percent GDP growth per annum for the Party to remain in power. Unlike Japan, the vast majority of Chinese people will grow old and never be rich. This suggests that we are witnessing the rise of a profoundly fragile power.

It would be better for China if it were a lot more like Japan. Economic malaise eventually led to a peaceful change of government in Tokyo. If the same were to occur in China, the transition might not be as smooth.

John Lee is a foreign policy research fellow at the Center for Independent Studies and a Visiting Fellow at the Hudson Institute in Washington. He is the author of Will China Fail? (CIS: 2009).

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