What’s next for state capitalism? Still more investment than consumption.

The Economist just hosted a timely debate on state capitalism. I notice that even those who believe state capitalism is a legitimate alternative of liberal capitalism mostly agree that countries of state capitalism tend to have worse problems of cronyism and injustice. The Chinese government has been relying on economic growth to sustain its legitimacy after the Mao era, but now many people are starting to ask why their living standard does not seem to rise with our miraculous GDP numbers. So I believe the government will have to invest more in social programs that help to manufacture public consent. But the innate mechanism of state capitalism determines that these social programs will still end up boosting government-run investment rather than domestic consumption.

China’s Ministry of Finance has just released some data of 2011. In 2011, the total tax income of the Chinese government reached a new record of RMB 10.37 trillion, that’s RMB 9000 tax burden on every Chinese citizen; meanwhile, the average income of Chinese people in 2011 is only RMB 24000 (around USD 4,000).

People on the Bund

The government spent most of its money on fixed asset investment rather than social welfare. This is what has been driving the GDP miracle of Chinese economy. A lot of these fixed asset projects became a way that public money is privatized.  The corruption cases happened in the construction of high-speed railway are prime examples. The wife of the former head of the Ministry of Railway became a billionaire simply by supplying all the toilets for all the bullet trains.  No wonder some people say that, in state capitalism, public property is just the private property of power-holders.

It’s hard to imagine that the ruling elites are willing to give back the power and wealth concentrated in their hands, but they do have to protect its legitimacy and appease public discontent. One example of what they plan to do next is the ambitious Welfare Housing Project. The central government announced that from 2011 to 2015  it will build a total of 36 million welfare apartment for low income families. This project has several advantages for the ruling elites: First, it can pop up the GDP numbers, stabilize employment rate and still allow the government to control economic agenda and resources. Second, the project will give people the impression that the government is giving back, though most of the existing welfare apartments ended up in the hands of government employees. Third, it allows the Chinese economy to keep relying on what it’s best at, namely , construction. No need to worry about innovation or entrepreneurship. Of course, the money invested in these apartment might not generate much return and there might even be significant financial risks if bank loans are involved. But with the big Chinese banks owned by the state, financial risks can be postponed and eventually socialized.
Many China observers are hoping that consumption will become the new engine of growth for Chinese economy soon. But to truly boost domestic consumption, it requires the government to not only transfer some wealth back to the people but also give up its control in the most profitable sectors of Chinese economy. I don’t see enough political will from the ruling elites to make such dramatic changes, as long as they believe investment projects, like welfare apartments, will buy them both public consent and GDP growth.


4 thoughts on “What’s next for state capitalism? Still more investment than consumption.

  1. Pingback: Bubble News – 2/18/2012 | The Bubble Bubble

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  4. This is so exciting! I don’t think you’ve taken into account the human factor, but I still think you make a lot of sense.

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