(Part 1 of this report is Caste-away.)

The greatest development story in history has run into serious roadblocks in the past two years.

China’s mammoth and largely successful efforts at improving the lot of its billion-odd people have run into the realities of the limits posed by centralized development. As with the Indian story of rural-versus-urban conflicts, China’s two distinct economies are spinning ever faster away from each other. Only a renewed focus on profitable growth can change the dynamics of China enough to rebalance its social gaps.

The country has seen a steady rise in the number of mass incidents/public disturbances since the beginning of this decade. [1] While authorities appear to have engaged in some subterfuge in reporting the data recently, by for example reclassifying different types of protests, the overall message of higher public participation seems irrefutable.

In a nominally totalitarian state, such expressions of protest may appear anachronistic, but they are well within the character of today’s China. Anecdotal evidence from various second-tier Chinese cities such as Shantou, Xiamen and Bobai show that protests over local issues such as enforced family planning or abrupt changes to development plans have quickly attracted a gaggle of unrelated protesters and quickly turned serious.

Central planning

As I wrote in previous articles, [2] Asian governments have intervened repeatedly in economic matters, and imposed grandiose projects at whim. These have been funded with public savings, and while the objectives of employment generation and urbanization are both laudable, many projects have failed to turn a dime in profits. The result has been a mess of publicly financed private vanity projects, which will eventually cause billions of dollars’ worth of loan losses for banks if left completely unchecked.

Various officials in China’s government certainly realize this, as recent conversations showed a greater understanding of the problem of “refreshing” defaulted loans with new bank loans by many of the country’s commercial banks. Economic Ministry officials readily admit that corruption [3] plays a large part in such decisions, but are less willing to attack the notion of central planning itself.

The initial phase of growth using export-led industries and ample local labor was easy enough. However, this was heavily concentrated in the southeastern part of the country, leaving other regions untouched. In that respect, China’s growth looks exactly like India’s even after keeping in mind the higher level.

To change the picture and allow for greater development, the Chinese government has pushed local officials to boost growth, thereby resulting in grandiose building projects in many cities. When the large number of vacant offices in Beijing and Shanghai are kept in mind, it is indeed intriguing to observe the continued eruption of new buildings in other Chinese cities. That feature owes much to people’s demands for being included in the country’s growth, and thus today’s boom in Chinese construction is simply a bricks-and-mortar version of India’s attempts at affirmative action that I wrote about in Part 1.

As with the futile Indian attempt to select education for candidates rather than candidates for education, China is attempting to select businesses for cities rather than the other way around. The introduction of non-economic agents into any economic process will cause imbalances. When one of the agents – say the businessman taking charge of the project – has goals other than profits on his mind, for example the prestige associated with being the biggest-in-show, other participants in the project, including bankers and employees, inevitably suffer. Away from boring economic topics, we can instead focus on the price of char siu, or indeed any other pork cut.

Hog cycles

Despite all machinations of centrally planned economies, agricultural products often suffer serious shortages or price hikes. Such incidents accelerate whenever governments intervene to control prices. The bread queues of the Soviet Union have now been replaced with the pork queues of China, but the process is in essence the same.

Since 2004, when pork prices declined sharply in China, farmers have cut back on raising new hogs because of concerns on profitability. The decline in hog production was assisted by ongoing population moves to urban centers, and also increased prices for feed due to the overall issues with food shortages. [4]

Ironically enough, a pork-barrel project in a distant land played a big part in the Chinese problem. The US government’s apparent efforts at reducing fuel dependency on the Middle East by increasing the use of “biofuels” such as corn-sourced ethanol helped to push up corn (maize) prices globally, which ended up hurting Chinese pig farmers, thereby playing a direct role in the current spike in pork prices.

Of course, Vice President Dick Cheney and his cohorts have no intention of reducing the imports of Middle East oil into the United States, especially when the close relationships with the region’s execrable dictators are considered. Their main objective was to push up corn prices to help farmers across the US Midwest, which counts as deeply powerful Republican territory. As I noted in the previous article on affirmative action in India, this was simply America’s version of a race to the bottom in being politically responsible.

Back to the situation at hand, just how concerned is the Chinese government? Enough to send Premier Wen Jiabao on a well-publicized visit to local farmers’ markets, wherein he reiterated the need for pork prices to remain stable. In essence, the message was one of admonishing farmers for cutting production, but in so doing, Wen highlighted the deep misunderstanding of market economies that exists in Beijing.

Vicious cycle

China’s version of misaligning its economic forces looks like this: government intervention to create grandiose projects, which push up commodity prices, which in turn help boost inflation. The government is no fan of inflation, and so attempts to bump up production to meet rising demand, but in so doing stands to lose ever greater amounts from any bust in the global economic cycle.

Its currency manipulation is a futile device designed to keep this charade going, but finally China has started importing inflation from other countries such as from higher oil and corn prices that have hurt feedstock prices, in turn pushing up the prices of staples like pork.

In addition to the obvious message [5] that I have focused on frequently in the past, the Chinese government also needs to remove itself from the business of, well, business. In particular, the local building projects that have underpinned investment booms in China over the past few years now look overstretched. Public disturbances over the illegal acquisition of land and other elements of “growth at all costs” have increased dramatically in recent years, which rising inflation can only push to boiling point. The government thus has little or no time to push through more aggressive structural reforms.

The road to hell is paved with good intentions; that saying appears both timely and eerily predictive of the efforts toward social justice in both China and India.

1. China Ministry of Public Security and US State Department.
2. Barbarians at Asia’s gates, Asia Times Online, January 27, 2007.
3. Wages of corruption, ATol, August 19, 2005.
4. Toward food FTAs, ATol, April 12, 2007.
5. Pegged problems, ATol, May 25, 2007.
This is the concluding article of a two-part report.