25 January, 2012

What is the Chongqing Model?

STRATFOR's paper on the domestic-consumption led growth model in China


The Chinese government is taking notice of recent economic and social successes in the inland city of Chongqing. Anchored by economic initiatives that promote domestic consumption, as opposed to the traditional export-oriented focus of China's coastal region, the so-called Chongqing model has been seen as responsible for the city's prosperity as growth slows in the rest of the country, and it appears to be under consideration for widespread implementation. However, a number of issues inherent in the model, including strong central control and massive government investment, will need to be addressed before it can become a viable, nationwide plan.


Chinese state-run media recently published a series of reports detailing the economic success and social achievements of the southwestern city of Chongqing. The reports praised the so-called Chongqing model, which is characterized by its unique approach to stimulating both the economy and ideological passion in its citizens, saying it is a reflection of current Communist Party of China (CPC) doctrines. Also, Chinese leadership has been visiting the city in the past few months.
This praise suggests Beijing may be reversing its earlier perceptions of the Chongqing model -- and its architect, CPC Chongqing Party Secretary Bo Xilai -- and may be a sign that both are gaining acceptance from China's political leadership. However, while the merits to the model are evidenced by Chongqing's successes, there will be constraints to its widespread implementation.

An Unorthodox New Direction

Chongqing, one of four Chinese municipalities administered by the central government, is located far inland from the country's political and economic center along the coast. Its heavy industry-based economy, its position as one of the Yangtze River's largest inland ports and its history as a political center in the 1930s-40s have made it the economic hub of Western China. However, the country's economic base has migrated eastward in the intervening years. The industrial upgrading of coastal cities since the mid-1980s and a massive reform of Chongqing's state-owned enterprises resulted in Chongqing lagging behind most first- and many second-tier Chinese cities economically. At the same time, factors such as deep-rooted corruption among the political and business elite, powerful organized criminal elements and high urban unemployment exacerbated by a large influx of rural migrants made it an environment conducive to social instability.
Upon his appointment to Chongqing in 2007, Bo implemented a series of initiatives to address both economic and social problems, including a massive crackdown on organized crime and the eradication of powerful political clans in the city. At the same time, Bo began a "Red campaign" that promoted CPC ideology by, among other tactics, advocating the teachings of former Chinese leader Mao Zedong and mandating the recital of nationalist songs. These high profile, controversial initiatives made Bo a polarizing figure among Chinese politicians, but little attention was paid to Chongqing's development.
For the economy, Bo took the municipality's focus away from the traditional export-based model of Chinese coastal cities and began developing domestic investment and consumption through government-led infrastructure projects, favorable policy incentives and relatively equalized social allocation. With abundant labor and resources in the region, Chongqing is largely self-sufficient -- and thus largely shielded from external vulnerability: During the 2008 economic crisis the country's gross domestic product (GDP) growth slowed to 9 percent, but Chongqing's GDP grew by 14.3 percent. Domestic consumption rose to about 50 percent of the economy, far above the national average of about 30 percent. Chongqing also became an attractive destination for foreign investment, which increased from $311 million in 2003 to $6.3 billion in 2010.
Importantly, this economic boom has not deepened the wealth gap among its residents, as has happened elsewhere. The social initiatives on which the Chongqing model is based encourage massive urbanization through relatively equalized wealth distribution and expanding coverage of social security networks (one official described these initiatives in terms of dividing a cake more equally, giving rise to the term "cake theory"). In 2011, household income for the Chongqing municipality's urban and rural populations increased by 15.5 percent and 22 percent respectively, significantly higher than the national average. Meanwhile, unlike in other Chinese cities where governments would make massive profits from land grabs, Chongqing allowed the rural population to retain ownership of their land even after urbanizing and helped them with temporary social welfare. As a result, the urbanization of 3.2 million people has not resulted in major unrest or grievances.

Beijing Takes Notice

The 2008 financial crisis accentuated the need for Chinese leadership to restructure the economy. For decades, China's economic model was based on a low-end manufacturing sector sustained by an abundance of inexpensive labor and booming external demand, as well as on support for small- to medium-sized private enterprises. However, the former was hit hard by its vulnerability to the global economy and increasing social instability resulting from a combination of low wages, rising unemployment and increasing costs of goods, while the latter was affected by growing governmental favoritism toward large state-owned businesses and centralized economic control.
With the coastal model risking failure, Beijing has taken notice of Chongqing's success, which appears to provide a solution to these issues in a way that appeals to renewed leftist sentiment in the central government. As China faces greater economic and social complexities, the central government may see the Chongqing model as something that can be applied across the country with regional modifications.
However, there are several issues inherent in the model that may impede its long-term success and widespread adoption. First, unlike in coastal regions where businesses and lower-level authorities are granted greater autonomy in their activities, the Chongqing model relies on a much more centralized economic authority, the city's municipal government, which retains strong control over fiscal revenues, local resources and economic activities. This control has allowed Chongqing to implement massive infrastructure projects to attract investment and, at the same time, disburse relatively equalized subsidies to the public to prevent social instability. Adopting the Chongqing model in other regions of China would require strong fiscal health and centralized support. That strong centralized command leaves the model vulnerable to misallocation of resources and wealth by those in power.
Meanwhile, despite the model engendering higher domestic consumption, the economy still is driven by massive government investment, which has resulted in large fiscal deficit and a government debt of up to 800 billion yuan ($126 billion), according to some estimates. This kind of investment has provided the city an interim economic boost, but it is unsustainable in the long term, posing financial risks and endangering development (in much the same way China's massive stimulus efforts in 2008-09 are continuing to affect the country). In addition, government-dominated investment activities are generally made via large business deals with powerful enterprises, which carry a higher risk of government-business relationships that could lead to corruption and the squeezing out of smaller private entities.
From a political view, the prominence of the Chongqing model comes from innovative local governance based on regional variance. But, as the government navigates through a leadership transition set for this year, the Chongqing model may also be an example that local politicians consider for the short term. The economic and social problems it has the potential to create must be addressed before it can become a viable, nationwide alternative to China's current economic model.

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