The announcement that China’s GDP had eclipsed that of Japan was greeted in some quarters in Tokyo with a solemn warning. Toyoo Gyohten, former vice-minister of finance for international affairs, warned that “China’s ascendency to No. 2 is very serious. This is clearly a very stark demonstration of a global power shift.”1. The former Japanese high official said this is less of a problem for Japan than a problem for the rest of the world, particularly the United States. Once again, the specter of the “China Threat” looms large over Tokyo, but this time economically. This raises the question of whether China’s GDP growth really contributes to her hegemonic power.
GDP or gross domestic product was developed in 1934 by Simon Kuznets for a U.S. Congressional report. It is defined as a measurement of the value of all goods and services produced within a given country in a given time, regardless of the ownership of those enterprises which produced these goods. This is in contrast to GNP or gross national product which is a measurement of all products produced by the enterprises owned by a given country’s citizens.2.
In recent years, GDP has been used as an indicator for the standard of living of a given country. However, this has proved to be misleading. Take the case of Egypt, which has had strong GDP growth for a number of years and aims to achieve annual economic growth of at least 7 percent over the next five years, but the majority of its citizens are, in fact, impoverished. Egyptians have experienced a steady deterioration of normal everyday life, culminating in an uprising and the overthrow of the Mubarak regime. That raises the question of the accuracy and usefulness of using GDP as a measure of a given economy or as an indicator of the well-being of its citizens.
One of the explanations for this paradoxical phenomenon could be polarization. The Gini Coefficient Index is a measurement of income inequality. A high index number indicates a greater inequality of income distribution. China’s Gini Coefficient Index has steadily climbed in recent years and this is rather disturbing. Liu Shengjun of Shanghai China Europe International Business School stated: “China’s Coefficient (a measure of income inequality) has risen to 0.49, much higher than in Europe and Japan (between .24 and .36). The combination of low per capita income and high Gini coefficient is dangerous and might cause social unrest. Furthermore, the relatively low consumption among the rich and the lack of strong middle class make it difficult for China to stimulate consumption demand as a replacement of export demand.”3.
China has only herself to blame for this predicament as she has over-relied on foreign trade by embracing globalization and has thus positioned her at the bottom of the global production chain. Over-reliance on foreign trade in the Chinese economy led China to join the WTO, but China has paid a heavy price for entry. As a result of joining the WTO, China lost the power to protect her farmers as well as her state monopoly on the distribution and export of goods. WTO entry removed China’s restriction on foreign ownership of sensitive industries such as telecommunications, insurance and banking. Moreover, under the present trade arrangement, hundreds of millions of Chinese have to work in miserable conditions, receive meager wages and produce hundreds of billions of dollars of consumer’s goods, at a great cost to the environment. These consumer goods are exported to the United States for pieces of paper called U.S. Treasury bonds which will never be repaid and which, in the end, will become worthless. Under the cover of equal treatment for foreign and national capital, Western multinational firms accelerated their efforts to dominate all sectors of the Chinese economy, from manufacturing and consumer markets to telecommunications and, eventually, banking.
The control of the banking and financial sector by Western capital will be a sad day for China. By controlling China’s domestic savings, the international banks will not only be able to finance the takeover of Chinese firms, but will also channel capital to unproductive and speculative sectors of the Chinese economy. This will create an asset-price bubble and bad loans in the banking sector, resulting in constant economic crises. Moreover, the foreign domination of the Chinese economy will lead to the dismantling of China’s national industry and thrust China into the role of an economic colony. This certainly will not bestow hegemonic power upon China. But it will certainly cause social unrest despite the fact that China’s GDP has grown at extraordinary double-digit rates. That raises another question: is GDP a good measure of economic progress?
In a landmark study of GDP, authors Cobb, Halstead and Rowe concluded that “The GDP is simply a gross measure of market activity, of money changing hands. It makes no distinction whatsoever between the desirable and the undesirable, or cost and gain. On top of that, it looks only at the portion of reality that economists choose to acknowledge — the part involved in monetary transaction. The crucial economic functions performed in the household and volunteer sectors go entirely un-reckoned. As a result, the GDP not only masks the breakdown of social structure and the natural habitat upon which the economy — the life itself — ultimately depend! Worse, it actually portrays such breakdown as economic gain.”4.
As a result, as Cobb et al. pointed out, the bombing of Oklahoma City would be an economic gain, as it generated a demand for security systems. On the question of obesity, American companies are spending $20 billion per year in advertising to encourage the overconsumption of foods. This successful marketing results in $110 billion of revenue in unhealthy fast food business. As a consequence of this ‘successful economic activity’, obesity has become a very serious problem in American society with associated mounting medical costs. America is the only country that spends 17 percent of her GDP on health care, but this enormous bill contributes to the aggregate U.S. economic activity.5.
Most importantly, GDP doesn’t take into account the incalculable consequences of resource depletion and environmental degradation, especially when the resources are not limitless. For example, the export of rare elements has been promoted by China since the adoption of the Open Door policy and the industry has made significant contribution to China’s GDP. However, China’s rare earth reserves have dropped 37 percent China will face a shortage in its own market in the near future.6.
Moreover, as a result of the production of radioactive tailings and over-exploitation of mining, China has become the most polluted country in the world. China’s pollution problem worsened when China decided to emulate the American model which is based on sprawl development, private automobile ownership and overconsumption with wasteful usage of energy. This development model has turned China into a leading contributor to global warming with ozone-damaging pollution which could reduce agricultural output by 10 percent or more.
As a result of becoming the factory of the world and welcoming foreign direct investment with open arms, Western multinationals have moved their operations which produce hazardous substances to China. For example, German chemical giant BASF plans to build the world’s largest Methylenediphenyldiisocyanate plant alongside the Three Gorges reservoir in China. Although this will contribute to China’s GDP, it will certainly be a “time bomb” with unthinkable consequences for China’s agriculture and water supplies affecting the health and well-being of hundreds of millions of people. This is an environmental catastrophe waiting to happen. However, GDP portrays the environmental degradation and resource depletion as economic gain.8.
Similarly, social issues such as cost of crime, prisons, social work, drug abuse and psychological counseling are calculated as an increase in GDP. Moreover, GDP ignores the issue of income distribution, as in the United States, “From 1973 to 1993, while GDP rose by over 50 percent, wages suffered a decline of almost 14 percent. Meanwhile, during the 1980s alone, the top 5 percent of households increased their real income by almost 20 percent. Yet the GDP presents this enormous gain at the top as a bounty to all.”7. It also avoids the problem of foreign borrowings, and this could have severe consequences, especially when American government, corporations and consumers are burdened with an ever-increasing high level of debt that already runs into the tens of trillions of dollars. America’s unimaginable amount of debt already resulted in the Great Recession of 2008. That raises the question of the viability of the U.S. model of capitalism as well as the sustainability of the American way of life, regardless of her high GDP.
In this regard, one might listen to the grave warning issued by Chris Clugston, an American researcher on sustainability: “Our American way of life is unsustainable; rather than attempting to perpetuate it, we must [bring about a] transition beyond it — quickly. Should we fail to do so, our society will collapse — in the not-too-distant future…We must overcome our tendency to waste increasingly limited time and resources on futile attempts to resolve problems associated with natural resource depletion, or natural habitat degradation or climate change, or overpopulation, or the economic crisis du jour.”9.
Across the Atlantic, environmentalist Professor Tim Jackson also calls for British policymakers “ [to step] off the GDP escalator” as the path to sustainable economies. Instead of employing GDP as a measurement of success, Britain should try to “build up sustainable infrastructures, to create resilient and sustainable economies. And a key part of sustainability is the support of social organizations that improve quality of life for everybody, such as health service, a strong agricultural base and education.”10.
Fittingly, basic health care, educational opportunities for all, a strong agricultural base and rural industrial development were exactly the stated policies which China had doggedly pursued before the Reform. In the pursuance of that policy, China was determined not to build any more cities and strived to escape the ultimate fate of many Western urban centres, where urban sprawl style development created traffic congestion, pollution, slums, poverty and overcrowding. Before the Reform, China did not useGDP as a yardstick to evaluate economic performance and she was on the way to developing a green economy. China intended to turn herself into one vast garden in which the countryside was to be endowed with parks, recreational facilities, hospitals, schools and supermarkets. Such a sustainable China would be a country without air pollution, water contamination and other environmental degradation, not to mention resource depletion.
Obviously, this version of development is diametrically opposite to the one since the Reform. The ecological consequences of China becoming the factory of the world have been disastrous. In addition to air pollution and contaminated water supply which will cause major health problems, China’s economic losses from environmental degradation are estimated to be equal to 18.9% of national income for 1992, which far outweighs the economic gain for that year, rendering China’s official statistical report of double-digit growth meaningless and misleading.11.
Notes:
1. Dawson, Chester: “Gyohten: “China as No. 2 Is Issue for all, Not Just Japan”, February 15, 2011 Wall Street Journal
2. Wikipedia: “GDP”
3. Liu Shengjun: “China Great GDP Leap Forward”, September 3, 2010 Harvard Business Review
4. Cobb, Halstead and Rowe: “If the GDP is Up, Why is America Down?” Atlantic Monthly 1995
5. Hanson, Jay: “What is wrong with GDP?” Dieoff.org
6. Reuters: “Update3—China to further cut rare earth quotas”, October 19, 2010
7. Yang Chuanmin: “Chemical reactions on the Yangtz”, May 17, 2010 Chinadialogue.net
8. Hanson, Jay: “What is wrong with GDP?” Dieoff.org
9. Clugston, Chris: “On American Sustainability—Summary”, August 18, 2008 Energy bulletin.net
10.Environmental Research Web: “Stepping off the GDP escalator path to sustainable economy”, January 13, 2011
11.Mao Yu-Shi: “The Economic Cost of Environmental Degradation China. A Summary”, www.library.utoronto.ca
