My last blog post was about the growing size of the middle class in China. Today we will look at the changes in their wealth and living conditions that can lead to the possible change of political regime in China.
The economic growth of China has been slowing down in the past six years. The Chinese economy grew 6.9% in 2015 and 6.7% in 2016, significantly lower than 10.6% in 2010 (World Development Indicator, 2016). Last year’s growth rate was the slowest growth in 26 years. When we calculated the average growth rate after China opened for foreign trade and investment in 1978, the average growth rate of the Chinese economy was 9.7%. During 2012-2015, the growth has dropped below 7%. The bright future is not likely to happen for the global economy if the biggest producer of the world with roughly 20% of the world population are going to have an economic collapse. That’s why we need to pay close attention to what will happen in China’s future.
The hypotheses about the relationship between the state of economic development and the political regime have been widely tested since Aristotle. Lipset (1959) used various indices of economic development – wealth, industrialization, urbanization, education and the indicator for democracy. He found that the average wealth, degree of industrialization and urbanization, and level of education are much higher for the more democratic countries. The increased wealth is not only related to the development of democracy by changing the social conditions of the workers, but it also affects the political role in the middle class through changing the shape of stratification structure so that it shifts from an elongated pyramid, with a large lower- class base, to a diamond with a growing middle-class.
Another important literature related directly to China is from Eckstein (1970). His study focused on the political change in communist systems and economic development. The study concluded that the capacities of the economic and political system are constrained by the stage of development. He explained that when there is economic development, there will be growing demand for technical and scientific skills. When the production technology requires less labor, there will be more labor surplus. There will be an increasing division of labor and a growing functional differentiation of occupations, occupation roles, and social roles (Eckstein, 1970, pp.491). Finally the process will produce a managerial elite class. These phenomena then produce an urban way of life, creating demand for consumer products. A command economy will become more and more difficult to manage as industrialization proceeds and as the economy becomes more complex. When the economy is more complex, it needs high reliability and transparency of information. The centralized command economy might end up with a lot of errors in the system because it cannot provide speedy and transparent information. The pressures to change the political system will be reinforced by a cross-cultural and transnational demonstration effect.
Acemoglu (2010) found that there is increasing recognition that institution and political economy factors are central to economic development. Many problems of development result from barriers to the adoption of new technologies, lack of property rights over land, labor and businesses, and policies distorting prices and incentives (Acemoglu, 2010, pp.10). In the 19th century, elites were landowners who enjoyed revenues and profit because of their political power, thus likely to take actions to preserve and consolidate their political power. The elites can lose their power to the middle class if the middle class is expanding and become wealthier. In the 20th century, the elite may correspond to segments of industrialists or bankers with a monopoly position. In some stances, the elite may simply be groups in control of the state apparatus after the end of colonialism (Acemoglu, 2016, pp. 247).
From the last blog post, I mentioned some of the the main ideas of the three-class model. The poor prefer the highest tax rate (or positive) since they do not have to pay. The rich prefer zero tax. The most preferred tax rate of the middle class could be zero or positive depending on whether their income is greater or less than the average income.
When we look at the average income, China’s per capita income in 2012 was $1,106.99 (World Development Indicator, 2016). And the urban middle class income can be calculated using the average income from two subcategories of the middle class;
From the calculation, the average income of the middle-class is a little bit higher than the per capita income. Therefore, we can imply that the middle-class in China will have different preferred tax rate than the poor. However, the preferred tax rate or economic policies of the middle-class are still far from the wealthiest group. They are still in need of infrastructure and welfare from the government like the poor. If the government impose too high tax, there could be a strong resistance from the middle class since they are now becoming the group that can put the pressure for the government to get the policy they want, otherwise, the political equilibrium will not be met.
From the structural changes in the income groups, there is a tendency that China will experience a serious pressure from the middle class for their preferred set of policies. The sluggish growth of China from 2010-2017 can also lead to the mobility among classes and inside a class. The upper middle-class will move to the mass middle-class if they lose their jobs and there is no welfare program to compensate. Jobs in some industries begin to move away from China because of the higher wages compared to emerging economies. The mass middle-income have a chance to be pushed down to the low income. Unskilled laborers in the inland China can be an example of this group. Since they do not have very high education, they do not have alternatives to choose if they are laid off from the footloose industry and have to move back to rural China to become farmers again.
When the society is not in political equilibrium, there are chances of social unrest and/or revolution. The process after can be explain by the following picture.
Source: Acemoglu and Robinson, 2006, pp.176.
It starts by the threat of revolution or social unrest. If the elites or ruling class do not want to have economic disruption from the protest or unrest, they need to commit to future policies to serve the majority in the country. That will lead to the introduction of democracy and more political power in the future.
In the next blog, we will explore together the current situation of political movements from both of the urban and mass middle-class in China to see what has happened and what policies the Chinese government has been trying to mitigate the pressure from this group.
See you next time!