Beijing's GDP Numerology

The unscientific origins of the national obsession with 8 percent -- no more, no less -- economic growth.

There are few constants during a time of economic uncertainty. But for those seeking solace in the midst of economic torment, look to the ongoing meetings of the National Peoples Congress in Beijing. Last week, Premier Wen Jiabao launched the sessions by delivering Chinas version of the State of the Union address. Although the world, rattled by the global financial crisis today, looks vastly different than it did a year ago, he repeated with all the certainty of a pastor pronouncing amen that in 2009, yet again, Beijing would be setting a target of 8 percent annual GDP growth.

In recent years, this official target has drastically underestimated Chinas actual growth. This time, many observers think it may be an overestimate. In both cases, the question remains: Why is 8 percent considered the magic number? (Surely it isnt just because in Mandarin, eight is a near homonym for prosperous and considered a lucky number.)

Most China watchers will tell you, as though it were a certain fact, that approximately 8 percent growth is the level needed to keep employment up -- and the potential for social unrest down. It is typically assumed that 8 percent is what is required to create enough jobs to absorb laid-off workers from failing state-owned enterprises (SOEs) and new graduates entering the labor pool. Senior leaders in China, from the president down to the lowliest county magistrate, pay homage to the importance of achieving 8 percent growth. No one claims to want much more (well, a little more cant hurt much), or much less. Too much more than 8, and you risk runaway inflation; much less than 8, and unemployed workers will march in the streets and chaos will ensue. But when and how did 8 percent become sacrosanct?

In all questions of faith, look first to ones creator. In this case, that means Deng Xiaoping. At the 12th Party Congress in September 1982, Deng determined that the national economic goal would be to quadruple the annual industrial and agricultural output of the entire country by the end of the century. Prior to the big meeting, Deng asked then General Secretary Hu Yaobang how the country could quadruple its economy from 710 billion yuan in 1980 to 2,800 billion yuan in 2000, and Hu responded that 8 percent annual growth would do the trick. Thats it. Theres no complicated secret formula, no hallowed equation precisely linking growth to employment, no connection to the revered words of Confucius, Mencius, or Lao-tzu. Back in 1982, it was determined that it would take 8 percent annual growth to quadruple the economy by 2000.

The end of the century has come and gone, but the target has remained the same. Subsequent five-year plans have all set an annual growth target between 7.5 and 8.5 percent. This national objective has since become the obsession of officials at each level of the governments vast bureaucracy.

The truth is, its hard to tell exactly what Chinas annual growth rate actually is. Because officials receive promotions based on how well they tend their economic gardens, theres a strong incentive for mandarins at all levels to fudge the numbers they report up the bureaucratic food chain. Each year, county officials are instructed to tally their economic growth figures and report them to the next level, which then reports to the provincial government, which reports to Beijing. Invariably, almost every province reports economic growth exceeding the national average -- which, of course, is impossible. As Jim Mann, the noted author and former China correspondent, once pointed out: It is like Lake Wobegon. All the children are beautiful and above average.

This presents difficulties for senior leaders in Beijing, who have to somehow adjust for such bureaucratic inflation. At least by now they are well aware of the phenomena. In the late 1950s, local officials showed similar zeal (and political acumen) when they inflated grain outputs in their reports to higher authorities, resulting in mass starvation when the central government failed to recognize the trend of inflationary reporting, known as the winds of exaggeration. China is not a federal system. Although Beijing does occasionally dispatch secret investigators, the central government remains almost entirely dependent on provincial reporting chains. Regardless of this statistical ambiguity, one thing remains certain: the national fixation on growth.

Although theres nothing magic about the 8 percent target, economic growth has long been linked to employment and social stability. In 1993, former Premier Zhu Rongji was promoted from his job as head of the Shanghai political machine to manage the countrys economy. The Central Committee that year promulgated an economic guidance document, the Decision on Issues Concerning the Establishment of a Socialist Market Economic Structure, ultimately resulting in a policy that became known as, grasping the large, letting go of the small. Millions of workers in small, inefficient SOEs were let go or xia gang -- meaning they were on permanent furlough without pay, but perhaps a token benefit package. Larger SOEs were reorganized, laying off millions more. Getting those workers back into the workforce was a top priority, lest they take to the streets with their idle time to complain about pensions that never materialized. Zhu was tasked with breaking the iron rice bowl and reforming the previously planned economy into a globally competitive one. However, finding jobs for the laid-off workers required massive capital investments in infrastructure and new, often foreign technology, resulting in rapid economic growth along with inflation rates of 10 to 15 percent per year in the first half of the decade. While Zhu accomplished his goal of growing the economy and averting social unrest, the rapid growth and volatility presented its own set of challenges.

Although Beijings obsession with employment is well known, its fear of inflation is an equally important motivator. Officials in China feel they must walk a fine line between creating jobs and keeping a lid on prices. Chinese historians point out that the Red Army alone did not defeat the Nationalists (KMT) in 1948 -- hyperinflation, which resulted in skyrocketing food prices, was an equally essential factor in undermining the KMTs legitimacy. Later, the Communist Party saw its own authority tremble in 1988, when inflation reached 20 percent, resulting in panic-buying and contributing to discontent that culminated in the Tiananmen Square protests of 1989.

Today as Beijing grapples with a global financial crisis, it might all come down to pork -- not wasteful government spending, but the other white meat. In China, gas prices are tightly controlled, and the government still manages grain prices. So food prices, and pork in particular, will play a significant role in Chinas economic recovery. China is the worlds largest producer and consumer of pork, which makes up 80 percent of meat consumed in the country, affecting almost every familys grocery budget.

Food contributes to at least a third of Chinas consumer price index (CPI) basket. As a measure of inflation, the CPI is closely watched as a barometer for potential unrest. Because lower income families have to devote a larger portion of their income to food, the government is particularly concerned about the impact of rising food prices on citizens that have not benefited from Chinas economic development -- and who are potentially dissatisfied with the government. Recognizing this, the National Development and Reform Commission, Chinas economic planning ministry, placed price controls on a number of food staples and building materials last year, trying to rein in rising prices, including a pork price increase of almost 60 percent over the previous year.

When I see Premier Wen Jiabao on Chinese TV, I am often filled with sympathy for him. Taking on the massive challenge of creating up to 9 million jobs a year in the midst of global financial turmoil and the anxiety caused by falling exports, the premiers annual work report at the National Peoples Congress is reassuring in its predictability and sense of certainty. Its no secret that 8 percent GDP growth will be a difficult target to reach this year. However, the premier is seeking to reassure his troops, preaching a message that resonates with his flock and silently invoking the convictions of Deng Xiaoping that Chinas economic growth is an article of faith.

AFP/Getty Images


The Worst Kind of Stimulus

Why a global weapons boom is the last thing we need.

By virtually all accounts, we are now in the midst of a global recession that shows no sign of improving anytime soon. During an unprecedented economic downturn like this, you might expect governments to be cutting back on unnecessary spending and pouring all their scarce resources into shoring up their economies and salvaging their imploding banking sectors. And you might think that, with the World Bank now warning that developing countries face a financing shortfall of up to $700 billion, wealthier nations would be husbanding their cash in case their help is needed.

But you'd be wrong. In fact, governments around the world are throwing billions into the one sector of their economies that will probably do the least good for the world: their military-industrial complexes.

The United States is a case in point. Last month, the Obama administration released a budget blueprint for the upcoming fiscal year that included $534 billion for the Department of Defense, as well as $130 billion for the wars in Iraq and Afghanistan. At $534 billion, President Barack Obamas Pentagon budget is $9 billion, or 1.7 percent, greater than the previous years budget after adjusting for inflation.

Rather than immediately reducing defense spending, as some U.S. liberals have called for, the Obama administration plans to institute change by providing more money for U.S. military personnel and less money for high-priced weapons systems. Given the manpower-intensive requirements of Iraq and Afghanistan, prioritizing men and women in uniform makes sense. Nevertheless, the usual complex of corporate-political interests stands ready to thwart any effort to recalibrate Pentagon spending.

Lawmakers on Capitol Hill are all too eager to aid defense industry lobbyists campaign to stifle progress; even under favorable economic conditions, members of Congress hate to cut funding for weapons built back in their home districts. Even after the Democratic partys takeover in 2007, Congresspeople have insisted on funding programs their constituents wanted but the Pentagon said it didnt need, such as the F-22, DDG-1000 destroyer, and the alternate engine for the Joint Strike Fighter. President Obama may have every intention of ending the days of giving defense contractors a blank check, as he said last week, but powerful entities block the road to reform.

The United States is hardly the only country ramping up military spending in 2009. China announced it would increase its defense budget by 15 percent over last years level. India said its increase would be a staggering 34 percent. And while Russia plans to submit a defense budget that is approximately 15 percent less than last years, it still intends to spend $111 billion over the next three years to purchase new weapons and modernize its armed forces.

Meanwhile, the United States remains far and away the global leader in overall defense spending. Consider that in 2007, the most recent year for which accurate data is available from the International Institute for Strategic Studies, the United States spent more on defense than the next 14 highest spending countries combined; accounted for 43 percent of the worlds total defense spending; and spent five times more on defense than China, eight times more than Russia, 85 times more than Iran, and 100 times more than North Korea. (These calculations were made using the highest possible budget estimates for these countries, whose precise spending levels are unknown.)

Despite its overwhelming dominance in overall spending, the United States did not have the fastest growing defense budget in the world between 2005 and 2007, the most recent period for which an accurate assessment is possible. That distinction belongs to Kazakhstan, which saw its defense budget increase by 84 percent. Other countries with booming budgets during this period included Angola (80 percent), Ukraine (57 percent), Jordan (57 percent), and Slovakia (55 percent). The United States, China, and Russia had more modest growth rates of 17 percent, 27 percent, and 33 percent, respectively.

In light of this rampant growth, the obvious question is: Why the unyielding surge in international defense expenditures? One explanation is that perceptions of threat have increased worldwide thanks to the ascension of previously inward-focused countries (such as China and India) and non-state actors into more prominent international roles. As countries survey the security environment today, they see more sources of potential danger than ever before. This fear is easy to act upon in the globalized international defense market, where armaments can be obtained from various state and private sources.

The greatest danger, of course, is that all this defense spending will set off a global arms race. History has shown that when one country elects to spend more on its military, other countries feel they have no choice but to accelerate their own defense buildups in response.

Will global defense spending slow down if economic conditions do not improve? Its doubtful. While there may be modest reductions on a country-by-country basis, economists agree that the worlds most powerful countries can still afford to spend as much on defense as they deem necessary without seriously endangering their national economic solvency even if other kinds of spending, such as for infrastructure or education, are ultimately more socially desirable ways to create long-term growth. If 2009 defense budgets are any indication, the profligate overall growth in global military expenditures does not appear likely to cease anytime soon.