Opinion Maker

Communist party leaders need to steer China away from export led growth towards more domestic consumption. 

Editor’s Note: Five-year plans were once the hall mark of Ayub regime that brought Pakistan on path to structured economic growth. The two Five-Year plans of Ayub Khan brought Pakistan into sharp focus as a developing economy. That was at one discontinued by Z. A. Bhutto resulting in total chaos and destruction of economic base. The wounds of Bhutto era have gone deeper with the passage of time. If Pakistan has to revive it’s economy, it must revert to the Five-Year plans.

By Stephen S. Roach 

In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers. This shift will have profound implications for China, the rest of Asia, and the broader global economy.In early March, China's National People’s Congress will approve its 12th Five-Year Plan. This plan is likely to go down in history as one of China's boldest strategic initiatives.

Like the Fifth Five-Year Plan, which set the stage for the "reforms and opening up" of the late 1970s, and the Ninth Five-Year Plan, which triggered the marketisation of state-owned enterprises in the mid-1990’s, the upcoming Plan will force China to rethink the core value propositions of its economy.

Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the "Four ‘Uns" – an economy whose strength on the surface masked a structure that was increasingly "unstable, unbalanced, uncoordinated, and ultimately unsustainable".

Re-balancing

The Great Recession of 2008-2009 suggests that China can no longer afford to treat the Four Uns as theoretical conjecture. The post-crisis era is likely to be characterized by lasting aftershocks in the developed world – undermining the external demand upon which China has long relied. That leaves China's government with little choice other than to turn to internal demand and tackle the Four Uns head on.

The 12th Five-Year Plan will do precisely that, focusing on three major pro-consumption initiatives. First, China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth. While the manufacturing approach served China well for 30 years, its dependence on capital-intensive, labor-saving productivity enhancement makes it incapable of absorbing the country's massive labor surplus.

Instead, under the new Plan, China will adopt a more labor-intensive services model. It will, one hopes, provide a detailed blueprint for the development of large-scale transactions-intensive industries such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality.

Such a transition would provide China with much greater job-creating potential. With the employment content of a unit of Chinese output more than 35 per cent higher in services than in manufacturing and construction, China could actually hit its employment target with slower GDP growth. Moreover, services are far less resource-intensive than manufacturing – offering China the added benefits of a lighter, cleaner, and greener growth model.

The new Plan's second pro-consumption initiative will seek to boost wages. The main focus will be the lagging wages of rural workers, whose per capita incomes are currently only 30 per cent of those in urban areas – precisely the opposite of China's aspirations for a more "harmonious society".

Among the reforms will be tax policies aimed at boosting rural purchasing power, measures to broaden rural land ownership, and technology-led programs to raise agricultural productivity.

Urban-rural divide

But the greatest leverage will undoubtedly come from policies that foster ongoing and rapid migration from the countryside to the cities. Since 2000, annual rural-to-urban migration has been running consistently at 15-20 million people.

For migration to continue at this pace, China will have to relax the long-entrenched strictures of its hukou, or household registration system, which limits labor-market flexibility by tethering workers and their benefits to their birthplace.

Boosting employment via services, and lifting wages through enhanced support for rural workers, will go a long way toward raising Chinese personal income, now running at just 42 per cent of GDP – half that of the United States. But more than higher growth in income from labor will be needed to boost Chinese private consumption. Major efforts to shift from saving toward spending are also required.

That issue frames the third major component of the new Plan’s pro-consumption agenda – the need to build a social safety net in order to reduce fear-driven precautionary saving. Specifically, that means social security, private pensions, and medical and unemployment insurance – plans that exist on paper but are woefully underfunded.

For example, in 2009, China's retirement-system assets – national social security, local government retirement benefit plans, and private sector pensions – totaled just RMB2.4 trillion ($364bn). That boils down to only about $470 of lifetime retirement benefits for the average Chinese worker. Little wonder that families save out of fear of the future. China's new Plan must rectify this shortfall immediately.

New industries

There will be far more to the 12th Five-Year Plan than these three pillars of pro-consumption policy. The Plan’s focus on accelerated development of several strategic emerging industries – from biotech and alternative energy to new materials and next-generation information technology – is also noteworthy.

But the emphasis on the Chinese consumer is likely to be the new Plan’s defining feature – sufficient, in my opinion, to boost private consumption as a share of Chinese GDP from its current rock-bottom reading of around 36 per cent to somewhere in the 42-45 per cent range by 2015. While still low by international standards, such an increase would nonetheless represent a critical step for China on the road to rebalancing.

It would also be a huge boost for China’s major trading partners – not just those in East Asia, but also growth-constrained European and US economies. Indeed, the 12th Five-Year Plan is likely to spark the greatest consumption story in modern history. Today’s post-crisis world could hardly ask for more.

But there is a catch: in shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the US. The possibility of such an asymmetrical global rebalancing – with China taking the lead and the developed world dragging its feet – could be the key unintended consequence of China’s 12th Five-Year Plan.

Stephen S. Roach, a member of the faculty of Yale University, is Non-Executive Chairman of Morgan Stanley Asia and author of The Next Asia.

This article was first published by Project Syndicate.