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GDP Growth Mode Breeds Vicious Circle

"Building a harmonious society" is becoming a buzzword, but people's understanding of what it is varies widely.

Some, for example, interpret that the established GDP-orientated development mode will remain in place but a larger portion of the results of economic growth will be earmarked to aid the disadvantaged groups. Balance and equilibrium in society would, therefore, be achieved and widespread harmony would be the result.

This school of thought, however, fails to see the relationship between the realignment of different interests and the development mode.

First of all, the serious disequilibrium in wealth distribution nowadays is a direct outcome of the current development mode.

So, readjusting the relationships between different interest groups is a pre-condition to the remolding of the development mode.

The current growth pattern is geared to catching up with the more developed economies in the world, so it is given excessively to pursuing high GDP goals and relies heavily on investment and exports.

It is this development mode itself that is responsible for distorted relationships between different groups of people.

First, in order to catch up with developed economies, priority should be given to technology-intensive and capital-intensive industries, at the expense of labour-intensive ones which offer huge employment opportunities.

Second, excessive emphasis on GDP growth has failed to ensure that the fruits of the economic development are shared by various groups of workers in a fair way.

Third, heavy reliance on investment and exports has set in motion a vicious cycle: Insufficient consumption demand suppresses commodities' prices in order to be more competitive. This results in low profits and slow wage increase, which in the end dampen consumption.

In view of all this, we should not consider the imbalance of interest relationships as merely the outcome of incorrect distribution policies, nor should we regard "building a harmonious society" as merely a means to make up for the losses of the disadvantaged, who have not shared in the prosperity brought by fast economic growth.

It is an impossible task to bring about balanced relationships between various interest groups in the absence of a development-mode transformation.

The old development mode that depends on high investment and exports has reached the end of the road. Currently, the investment rate in China stands at 40 percent and the growth rate in fixed-assets investment has reached 40 percent. Such high rates can hardly be maintained in the future.

In addition, it is difficult for the high export growth to continue. In July, for example, the growth rate of the country's exports was 5.1 percentage points lower than the same period last year.

All this calls for a new model of development.

The core of the change lies in boosting domestic consumption demand and making it a powerful engine driving the economy.

The country is able to turn out large quantities of goods, thanks to fast development over the past 20 years or so. But the weak domestic market is unable to digest the massive number of commodities.

Official statistics, for example, reveal that the proportion of the goods that outstripped demand increased from 14.6 percent in 1995 to 86.3 percent in 2002. This figure reached 90 percent in 2003.

Behind the market glut is the slow consumption growth.

For example, urban residents' consumption rose 6.6 percent on average each year between 1990 and 2003 against the annual 8.2 percent GDP growth in the same period. The rate of rural residents' consumption growth was even much lower.

It is safe to say that the weak demand and unhelpful development mode interact with each other as both causes and effects. They multiply each other and combine to bring about the vicious cycle mentioned in previous paragraphs.

In the absence of strong demand, we have no other choice but to rely heavily on investment and exports to keep up growth.

Now it is high time to redress the direction in which things are moving. What we need is a benign cycle: Income rises - strong demand - less reliance on exports - no need to keep commodity prices low - still more income rises.

To achieve this, a number of issues need to be tackled.

First, the situation that "fast economic growth fails to bring real benefits to a substantial portion of people" should be redressed.

The increase of ordinary people's income has long lagged behind the GDP growth.

Moreover, the gap between wage increase and GDP growth has been widening in recent years. In 2002, for example, the total wage volume of the country stood at 1,200 billion yuan (US$148 billion), accounting for merely 12 percent of that year's GDP volume 10,000 billion yuan (US$1,233 billion).

Second, it is urgent to promote employment.

In this regard, small and medium-sized enterprises, which combined are a major employer, should be given priority for development. Employment is a vitally important means to regulate the relationships between different interest groups. Sound employment, or relatively sound employment, helps ratchet up the income of the masses as a whole and, in turn, promotes consumption.

Third, polarization in wealth distribution should be addressed.

Statistics show that 20 percent of the richest people in the country own 80 percent of the social wealth.

This gives rise to the situation that on the one hand, the handful of rich people have a demand glut, even though their purchasing power seems limitless. On the other hand, the poorer people, who make up the bulk of the population, have limited purchasing power, though they have many needs.

Polarization, as we can see, simply prevents an effective domestic market from taking shape.

Fourth, it is necessary to introduce a sound and wide-ranging social security system.

To achieve this, we need to do away with some misleading ideas in the first place.

To begin with, some regard social security affairs simply as charity or humanitarian undertakings. But in fact, social security itself is an important factor in shoring up demand, which, in turn, helps power the economy.

In addition, some think social security is expensive and it is better to go for it only when the financial conditions of the country are more favourable. This is nonsense.

The United States, for example, set up the framework of a welfare country in 1935 when the country was still in the shadow of the Depression. Why did it do this? The reason was simple. Without the social security system, demand and purchasing power would be insufficient, and the problem of overproduction could not be resolved.

Note: the author is a professor of the Sociology Department of Tsinghua University

(China Daily December 1, 2005)

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