Reducing inequality: 3 tips from China for the G20

Thursday, September 1, 2016 - 15:08

As China prepares to host the G20 summit, much of the media attention is focusing on China itself. Preparations for the summit have involved draconian measures, according to this piece in the New York Times. China is more concerned with style and saving face than substance, according to this Yahoo News report.

While there may be some truth to this line of attack, it largely ignores the fact that China is hardly the first country to hurt ordinary people to prepare for VIP events. (The Rio Olympic Games just provided an illustration of this point.)

And though there has also been plenty of commentary on the G20 agenda, trade and economic policy, there is one glaring omission in all of the Western coverage to date.

2015 saw the end of the Millenium Development Goals (MDGs) implementation and the launch of the Sustainable Development Goals (SDGs). There was much fanfare about the fact that the world as a whole met most of the MDG targets including halving the percentage of people living in hunger and poverty, defined as $1.25-per-day or its equivalent. Leaving aside the problems with this definition of poverty, few point out that if you were to exclude China from the statistics, the rest of the  world would not have met this global target. Other countries that contributed to poverty reduction – notably India – met the income targets but did not come close to meeting the hunger and malnutrition targets related to this goal.

So despite its problems, China’s development path clearly offers some food for thought for developing (and developed) countries that are meeting in Hangzhou this weekend. What are those lessons?

1. Build a strong base

Most of the histories of the economic successes of China begin in the late 1990s, when China was preparing to join the WTO, something it finally did in 2001. Or you could date it back to 1978, the year that China adopted its “Open Door Policy”, allowing foreign investment for the first time.

While there are no doubt lessons to be learned from the recent period of Chinese development, it’s crucial to understand that China built a development base before it opened its borders. China had invested heavily in healthcare, reaching some 90% of the rural population by 1980 through a variety of schemes, most famously the investment in training farmers in basic medicine (the “barefoot doctors”). Public education was also a high priority and China had more than halved its illiteracy levels in the period from 1950 to1980.

Investing in social services including healthcare and education in the period before liberalization is a crucial part of China’s success story.

2. Don’t mine yourself to death

It’s a common misconception that China imports raw materials from the rest of the world because China does not have many raw materials. China does have abundant mineral resources, but local and federal governments rarely prioritize developing this sector. Natural resources had little to do with China’s success in reducing poverty.

When we compare China with other countries – say oil-rich Nigeria, de-industrializing Brazil, and resource-poor South Korea – we can conclude that those countries that don’t rely on natural resources actually do better. Economist Joseph Stiglitz has some interesting insights as to why that might be the case. The short version is that countries without resources tend to think of economic strategies that rely on importing something cheap and then turning it into something more valuable. The process involves more labor and more skilled labor than just taking something out of the ground, and a smart development strategy would involve thinking about moving onto the next level. For example, South Korea went from making steel to making copper wires to making ships to making microchips over the course a few decades. That process created more growth and led to less poverty and inequality than almost any other example in history.

3. Liberalize on your own terms

When China did open the door to foreign investment in the late 1970s, it did so under a lot of conditions. For example, when foreign automakers opened facilities in China, they had to be majority-owned by Chinese partners. China taxed large companies at a high 33% and continues to take measures to ensure that companies operating in China pay their fair share of tax. If and when the leaders of those companies or government officials prove to be corrupt, they are held accountable (though not always in ways that adhere to human rights principles).

Does any of this mean that China should not be held accountable for its shortcomings? Of course not. But it’s important to recognize the positive in China’s economic model, much of which runs contrary to neoliberal economic “wisdom” and some of which we at ActionAid have come to recognize to be key aspects of a development policy that respects human rights and reduces inequality. Neither our recent jobs and industrial policy report nor our recent tax incentives report specifically reference the Chinese example, but one could argue that China learned decades ago what we are still discovering. Other developing countries within and outside of the G20 should think long and hard about how China has been able to grow and develop without leaving big chunks of the population behind.