China's GDP Strategy: Make People Happy

Heading into China's National People's Congress (NPC) this week, which is something akin to the start of a new congress in the U.S., the chatter has been noticeably less on GDP growth and more on happiness. Indeed, Premier Wen Jiabao revealed over the weekend that the government plans to set a growth target of 7% for the 12th Five-Year Plan (FYP), lower than in the previous plan (big caveat: China has consistently overshot its growth goal so the target in and of itself has little meaning). Since the NPC is expected to formally ratify the 12th FYP, Wen's comments on the growth target is likely what's going into the plan.

So impressive GDP growth can't buy happiness you say? That seems to be the case and official message, judging from a focus on overall happiness and general well-being that has marked both the official and unofficial press in recent weeks. First, it was the official Xinhua that ran a lengthy discussion (in Chinese) of why the government needs to emphasize "people's livelihoods" and "quality of life" over breakneck growth. And the respectable Economic Observer undertook a survey of "happiness" in different cities and among different demographics (sorry, also in Chinese) -- the middle class in the southern city of Shenzhen seems one of the happiest, commanding five stars! Incidentally, Guangdong province, in which Shenzhen is located, has been rolling with the slogan "happy Guangdong" -- a campaign spearheaded by the provincial party secretary and President Hu Jintao protege Wang Yang.

Even serious economists like Hu Angang of Tsinghua University are pushing for a Gross National Happiness index first endorsed by the tiny kingdom of Bhutan -- which echoes some of the concepts behind the Human Development Index. The notion is simple: Economic growth alone differs from development, which incorporates a comprehensive set of criteria like sustainability, environmental protection, welfare, and social equity. Chinese officials have reduced this persistent dissonance in China to even simpler form, contained in the epithet: "wealthy country, poor people." So what's the new slogan? How about "guo qiang min fu, guo min gong fu" (strong and wealthy country, with citizens sharing the wealth...hmm, that does not translate well into English...), at least according to Xinhua.

Indeed, the guiding theme of the 12th FYP is the shift of focus from "growth" to "development" and "people-oriented growth." So this eleventh-hour magnification of happiness and qualitative growth themes should be viewed as political signaling that aligns with the new economic plan. But much more needs to be done beyond sloganeering and catchphrases to actually achieve the happiness objective. Take a look, for instance, at some of the proposed 12th FYP growth targets from select provinces:

Even if you can't match the specific province with the growth target, it seems fairly obvious that the 7% growth target proposed by Wen would be easily smashed. Only four provinces -- Beijing, Guangdong, Zhejiang, and Hebei -- have single-digit growth rates. Well, this is certainly not the first time that local authorities have been overzealous about growth in their own provinces. But this time, Beijing seems to be pressuring localities to also simultaneously incorporate an income growth metric that is indexed to growth. So if you want to grow, you better make sure you're also fattening the checkbooks of individuals at more or less the same rate. More income equals more consumption? Not necessarily, as you need to provide incentives to channel the additional income to spending rather than savings. More Mao bucks in the average Zhou's pocket certainly helps, but reviving and fortifying a broken social safety net is equally important. So much for socialism in China.   

Now how do you get the local governments to behave in such a way that would allow execution of an agenda that is meant to de-emphasize GDP? One tactic would be to change political incentives. Delinking a provincial politician's promotion and political prospects from growth targets would be a good start. Instead, weigh environmental sustainability, energy efficiency, income and welfare, and educational and cultural promotion on equal footing as GDP and jobs. But if you're the governor of a cash-strapped poor province, the tangible stuff of growth -- new roads, factories, and airports--are much easier to accomplish than the intangibles -- education, culture, welfare, etc. Besides, there's still easy and fast money to be made in property, so why do the heavy lifting on pensions and healthcare?

Whether China can seriously transform some of the political incentives to achieve its espoused economic objectives is crucial to the success of the 12th FYP. Beijing is indeed telegraphing the intent to close the curtains on the era of "GDP fetish." But not everyone in China agrees or think it necessary.