Professor Barry Eichengreen : Chinese Industrialization and its Discontents

As the Third Plenum of the 18th Central Committee of the Chinese Communist Party convenes in Beijing, China stands at a crossroads. Its recent growth record is stupendous; no country in history can match it. But China’s economic imbalances are also stupendous. The country has sustained its output growth by investing fully one-half of GDP, though no country can productively invest more than a third of national income for an extended period. Household consumption accounts for only one-third of GDP, compared to two-thirds in a normal economy.

Associated with this low level of consumption is widening inequality – between the countryside and the cities, and between the political elites and the masses. University graduates with rising aspirations cannot find the office jobs that they seek and will not accept the factory jobs that they are offered. Social unrest, whether expressed in blogs or spontaneous demonstrations, is mounting.

China’s leaders understand all of this. They acknowledge the need to rebalance the economy from investment to consumption, and they recognize that this means developing the service sector, where good white-collar jobs will be found. They also appreciate the need to build a social safety net and strengthen rural property rights.

But Chinese officials worry that the shift from investment to consumption, and from manufacturing to services, will mean slower growth. Less investment will mean less capital deepening. Expanding the service sector, where productivity is low, will hold back aggregate output. And if growth decelerates further – the annual rate has already dropped from 10% to 7.5% – social unrest may increase.

Knowing this, Chinese leaders may hesitate to move ahead with needed reforms, causing imbalances to continue to rise. But this cannot go on indefinitely. At some point, the ticking time bomb will explode, and the growth rate will crash.

So where should Chinese leaders look for help in meeting these challenges?

It may seem improbable, but they can find guidance from the United Kingdom. Just as Chinese industrialization is unprecedented – no developing country has grown by more than 10% per year without interruption for two full decades – Britain’s industrialization 200 years ago was similarly unparalleled.

Britain was, of course, the homeland of the Industrial Revolution. Its economic growth was faster than that of any economy in human history up to that time.

But Britain’s rapid growth created severe problems. There was growing inequality, or so it appears from recent scholarly contributions to the so-called “standard-of-living debate.” There was the alienation of smallholders’ property, in what was known as the “enclosure movement.” And there were complaints about urban pollution and inhumane factory conditions in what William Blake called Britain’s “dark Satanic mills.”

Inevitably, there were eruptions of social unrest. Recall the Luddites, who responded to the early nineteenth-century mechanization of the textile industry by smashing the new technology, and the Swing Riots, in which workers destroyed threshing machines.

British politicians responded by reforming the social safety net. In 1834, the New Poor Law established national standards for social benefits. In the face of considerable controversy, assistance continued to be provided without requiring the poor to enter oppressive workhouses. Outdoor relief, as the alternative was known, was expanded as the most cost-effective way to address the poverty problem.

Second, political reform gave voice to the rising middle classes. The 1832 Reform Act gave the vote to individuals with at least £10 of property – not an inconsequential sum, to be sure, but low enough to enfranchise the middle class. The act also created a system of special courts to adjudicate disputes over voter registration.

Moreover, along with political reform came policy changes aimed at rebalancing the economy. Abolition in 1846 of the Corn Laws, which had propped up the declining agricultural sector, facilitated structural shifts, first toward manufacturing and then toward services, notably financial services.

Finally, British politicians did not seek to maintain at any cost their country’s position as the world’s fastest-growing economy. Admittedly, they faced criticism when the United States, Germany, and other countries overtook Britain in the late nineteenth century. But, by not standing in the way of the economy’s natural evolution from agriculture to industry and then to services, they enabled the United Kingdom to enjoy a full century of sustained economic growth.

China may regard the nineteenth-century experience of a windswept island off the northwest coast of Europe as an odd source of inspiration. But if Chinese leaders meeting at their party plenum accomplish half as much as their nineteenth-century English predecessors, they will have done very well indeed.