Towards Global Convergence - Emerging Economies, The Rise of China and Western Sunset

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Towards global convergence: Emerging economies, the rise of China and western sunset?
Michael Dunford and Godfrey Yeung European Urban and Regional Studies 2011 18: 22 originally published online 3 November 2010 DOI: 10.1177/0969776410382596 The online version of this article can be found at: http://eur.sagepub.com/content/18/1/22
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Article
European Urban and Regional Studies
Towards global convergence: Emerging economies, the rise of China and western sunset?
Michael Dunford Godfrey Yeung
Abstract
European Urban and Regional Studies 18(1) 2246 The Author(s) 2011 Reprints and permission: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/0969776410382596 http://eur.sagepub.com
Chinese Academy of Sciences, China, and University of Sussex, UK
National University of Singapore
The financial crisis indicates the underlying bankruptcy of the last of a series of attempts to restore sustained growth in advanced countries since the end of the post-war Golden Age: Italian flexible specialization, Japanese and Rhine-style lean production, the new economy and Anglo-American financialization. Over the same period a number of emerging economies and in particular China have sustained high rates of growth. In the years to come, developed country growth is likely to remain slow because no alternative high-growth model is on the horizon. A country such as China conversely has the potential to continue to grow relatively fast provided it can profoundly alter its model of development in ways that address global and national imbalances. If it and other large emerging economies do achieve further sustained growth, this will in effect reverse the gap created by industrial revolution, colonialism and imperialism. The aim of this paper is to explain the reasons for and the possibilities of such global convergence, paying particular attention to the reasons for and implications of the financial crisis and the extent to which Chinas fiscal stimulus contributes to a new model of Chinese development.
Keywords
China, convergence, Europe, financial crisis, financialization, North America, sustainable development, varieties of capitalism
Introduction
At the centre of this paper is the idea that the present moment is a turning point in the geography of global development. For well over 200 years, global economic inequalities have on the whole increased. At the dawn of the industrial revolution, the differences in per capita income between Western Europe on the one hand and India, Africa or China on the other were probably no more than 30 percent (Bairoch, 1981) and, although Western Europe was the core of a set of commercial empires, Asia was the centre of world manufacturing. This situation changed radically and rapidly with the onset of the industrial revolution: a
Corresponding author: Professor Michael Dunford, Key Laboratory of Sustainable Regional Sustainable Development Modeling, Institute of Geographical Sciences and Natural Resources Research, Chinese Academy of Sciences, Beijing, China; and School of Global Studies, University of Sussex, Falmer, Brighton BN1 9QN, UK Email: M.F.Dunford@sussex.ac.uk
Dunford and Yeung number of regions in Western Europe emerged as the first centres of modern manufacturing, and economic development then diffused to a number of whitesettled countries, while Great Britain and subsequently the United States (USA) emerged as economically and politically hegemonic powers. In 1820 the per capita income of the wealthiest countries was three times that of the poorest. By 1870 it was 7 times and by 1913 it was 11 times higher. By 1997, the one-fifth of the worlds population living in the richest countries was 74 times as rich as the one-fifth in the poorest, up from 60 in 1990 and 30 in 1960 (UNDP, 1999: 3). The reason for global divergence was that very few of the economies that embarked on the path of economic and social modernization achieved sustained growth. After the Second World War, Western and Southern Europe grew rapidly, and, in Asia, first Japan and subsequently four Asian Tiger economies (South Korea, Taiwan, Singapore and Hong Kong) joined the ranks of the modern industrial societies. Most other economies have so far failed to achieve sustained growth. In 1991, the final collapse of the Soviet bloc and of its attempt to find an alternative path to modernization seemed to re-establish the uncontested supremacy of the western world. Abstract conceptions of Anglo-American capitalism and western political institutions were advanced as globally ideal models. The instrument for the reconfiguration of economic and political institutions was the Washington Consensus. A potent ideological symbol was Fukuyamas (1989) conception of the end of history (Pickles, 2010; Smith and Timr, 2010). In Asia, however, significant political and economic developments were under way. The establishment in 1949 of the Peoples Republic saw China regain sovereignty after a century of foreign domination and civil war. After 1978 the adoption of a programme of reform and opening-up enabled China to embark on a remarkable process of economic growth. At about the same time, another Asian giant in the shape of India also embarked on a more sustained growth path. The implications of these developments emerged more clearly after the Asian crisis in 1997/8. The rise of Asia was an important step in the reconfiguration of global development, not least because a number of
23 important emerging market economies were able to escape the Washington Consensus. One reason was that greater global integration saw sharp increases in the size of the world labour force. A second and more important reason was that, in Asia, competitive devaluations saw strong export surges and the transformation of a series of countries that were formerly debtors into creditors (Aglietta and Rebrioux, 2005). Conversely, a number of important developed countries were changed from creditors to debtors. More recently, a number of other countries such as Russia and Brazil also managed to embark on new courses. In the developed world, the onset of the current financial crisis along with a series of disastrous military interventions seriously weakened the USA and its closest allies. In 2007, measured in gross domestic product (GDP) at market exchange rates, China overtook Germany to become the worlds thirdlargest national economy. The top two were the USA and Japan (IMF, 2008). Measured at purchasing power parities (PPPs), China had been the third largest since 1995. In the years that followed the Asian financial crisis of 1997/8, emerging economies grew on average at 6.1 percent compared with 2.6 percent for developed economies. The core argument of this paper is that in all probability the group of emerging economies and in particular China will sustain their recent growth advantage in a context of at least initially slower global growth. In the western world, it will be argued, a set of strategies designed to restore sustained growth have all proved wanting, and the recent economic crisis will have a negative impact that is greater and more sustained in the developed world, not least because no alternative growth model is on the horizon. A country such as China conversely has the potential to sustain relatively high rates of growth for many years to come. To realize this potential it will, however, have to alter its model of development profoundly. If it does so, and if other large Asian economies (along perhaps with countries such as Russia and Brazil in the so-called BRIC1) continue to grow, these emerging countries will lead world growth. In that case, 25 years hence Asia may account for 66 percent of world GDP. If it does so, it will in effect reverse the
24 gap created by industrial revolution, colonialism and imperialism and re-establish, in some respects, the status quo ex ante. To develop this argument this paper will be divided into six sections. The first will identify some of the conceptual ideas that underpin this paper. The second will document recent and projected future trends in global development. The third is devoted to a critical examination of successive attempts in the developed world to establish a new development model. The fourth identifies some of the major global imbalances engendered by the dynamic interaction of developed and emerging economies. In the fifth, attention is paid to the structural imbalances associated with Chinese growth and asks whether recent reforms and in particular the recent fiscal stimulus package provide the foundations for a restructuring of the existing development model capable of ensuring continued fast relative growth. The final section draws some conclusions.
European Urban and Regional Studies 18(1) counts for more than individual aspirations. Major differences in the institutional framework and in economic conduct derive from these social conditions: on the positive side, a respect for commitments, guanxi (personal relations), associated principles of reciprocity and strong group and national loyalty are all cases in point, as on the negative side are the risks of the corruption of officials (see Redding 1993; Redding and Witt, 2007). In the western world, what are called capitalist economies are underpinned by private legal contracts and are driven forward mainly by the pursuit of private self-interest. Abstract models suggest that such economies are efficient only insofar as contracts are complete, so that rights and responsibilities are determined for all eventualities. In practice, asymmetric information and a wide range of externalities ensure that contracts are incomplete, with the result that market failure is frequent, especially in the worlds of finance, the protection of the environment, the provision of public goods and protection against social risks (Polanyi, 1944; Ostrom, 1990; Perrons and Posocco, 2009). Within the western world, these externalities have resulted in a variety of welfare and other economic reforms that qualify to different degrees the scope of capitalist principles, generating a number of distinctive national varieties of capitalism: an AngloAmerican outsider model of corporate control (with large equity markets, dispersed ownership and active markets for corporate control), as compared with the insider continental European model (with a smaller number of quoted companies, more concentrated share ownership and a relatively small amount of takeover activity), and an American individualistic and market-driven model of welfare as compared with the strong Nordic welfare states and a European social model involving stronger collective action to correct market failures, a higher degree of solidarity and stronger social protection. All of these western economies are therefore also to different degrees mixed economies in which capitalist principles prevail alongside principles of planning, collective ownership and social rights, although the scope of capitalist principles can wax and wane, seeing a significant expansion in the neoliberal era that dates from the late 1970s (Harvey, 2005).
Conceptual foundations
The years since the early 1980s have seen the resurgence of abstract conceptions of market economies and economic equilibrium and a marginalization of alternative Keynesian and Marxist conceptions of economic growth and instability. In each case, however, insufficient attention is paid to the social and cultural foundations of economic life. As the literature on varieties of capitalism demonstrates (Albert, 1993; Hall and Soskice, 2001; Peck and Theodore, 2007), the social foundations of capitalism play a major part in shaping the structure, dynamics and comparative performance of different national models of capitalism. In Asia, and more specifically in China, there is a long tradition of a commodity-producing (market) economy developed and regulated by a hierarchically organized central state and of collective ownership of economic assets. The existence of a strong state and of rule by public officials (guan ben wei) is in fact a deep-rooted feature of Chinese development. These economic and political arrangements are rooted in a society permeated by a 2500-year Confucian tradition in which the common good
Dunford and Yeung Extending this institutional approach to the international scale involves two steps. The first is a conception of the global system as a constellation of national institutional configurations and interests that shape economic trends. The second is recognition of two issues. The first is the asymmetric integration of varying national models of development and the rise and decline of hegemonic powers, countries subject to different degrees of domination and contender states (Van der Pijl, 2006). The second concerns the ways in which integration, interaction and interdependence modify the internal dynamics of national configurations and generate international/global disequilibria. These conceptions of the trajectories of different models of capitalism and of their asymmetric integration in a global order provide the foundations for an augmented regulation theoretic account not just of the existence of a succession of structural crises reflecting underlying contradictions/disequilibria but also of structures of international economic interdependence and the successive shifts in geographical centres of economic gravity (Aglietta, 1998; Dunford, 2000, 2005). The recent financial crisis is just the most recent of a series of enduring crises that have punctuated the development of industrial capitalism. The first occurred after the Napoleonic wars and saw, depending on the industrial or agrarian character of the country, the first crisis of industrial capitalism or the last (Malthusian) crisis of the ancien rgime. The second occurred in the Great Depression of the late 19th century. The third occurred in the period between the First and Second World Wars. The fourth started at the end of the 1960s. The fifth dates from the onset of the recent global financial crisis (Reinhart and Rogoff, 2009). Throughout the long periods between these phases of turmoil, developed capitalist economies were reasonably dynamic and stable owing to the emergence of a sequence of new development models, often centred on fundamental transformations of the preceding economic and social order. The shape of the world in the years to come will similarly depend on the adequacy and success of adjustments made to adapt to the current crisis.
25
Comparative global development

Measured in terms of per capita GDP in 1990 PPP dollars (Figure 1), the world remains extremely unevenly developed. There are high levels of per capita income in North America, Australia and New Zealand ($30,287), Western Europe ($21,547), Japan ($22,867) and the Asian Tiger economies ($21,448). Next came Russia ($9069) and the rest of Eastern Europe ($7662), though there are very wide gaps between the central European Union member states and members of the Commonwealth of Independent States (CIS). In Africa, per capita GDP stood at just $1918. Countries such as China ($6034) and India ($3004) still have relatively low levels of income per head. It is important to note, however, that the most recent Groningen Growth and Development Centre (2009) estimates of Chinas PPP-converted GDP level in US dollars were adjusted downwards by 22.6 percent to represent more accurately urban price levels. This adjustment was motivated by the results of recent World Bank PPP estimates for 2005 (World Bank, 2008). Adjustments have not yet been made to GDP estimates for other countries. Even at these adjusted estimates the Chinese economy is nonetheless extremely large, as the surface of the areas in Figure 1 shows: in 2008 its total GDP at PPP stood at $8007 trillion, compared with $8724 trillion for Western Europe and $10,971 trillion for North America and Oceania. In the recent past, however, many of the comparably low per capita income parts of Asia have experienced relatively fast economic growth (Figure 2). In most of the continental zones identified in Figure 2, growth rates were faster in the 196073 Golden Age than in subsequent cycles. In the case of Western Europe, growth rates in each subsequent cycle were less than one-half of Golden Age growth rates. The USA, Canada, Australia and New Zealand saw output grow relatively faster than Western Europe, although their per capita growth rates were at best the same as those of Western Europe because higher GDP growth rates were accompanied by stronger demographic growth. Communist Eastern Europe also saw strong growth in 196073. Subsequent growth slowdowns saw the collapse of communism
26
35,000 USA and Oceania Western Europe Tigers 20,000 Japan
European Urban and Regional Studies 18(1)
30,000
GDP per capita in 2008 in 1990 GK$
25,000
15,000 Russia 10,000 Rest of Eastern Europe China India Rest of Latin America Brazil Rest of Asia Middle East and Turkey
5000
Africa 0 0 1000 2000 3000 4000 5000 6000 7000
Figure 1. Total population, 2008 GDP per capita and total GDP in millions of 1990 US$, converted at Geary-Khamis (GK) PPPs
Source: Elaborated from Groningen Growth and Development Centre (2009). Notes: The column width of each bloc represents the population of the country or region. The area of each bloc represents the total GDP at PPP of the country or region.
and opened the path to rapid transitions to capitalism. The consequences of these transitions for output were little short of catastrophic. In 198997, output declined at an average of 4.9 percent per year. In 1997, output still stood at just 68 percent of its 1989 level. Forgone output over these years was massive. In these transition economies, growth subsequently picked up, yet in 2008 output stood at a mere 114 percent of its 1989 level. More recent growth has depended to a significant extent on net capital inflows, which contributed to unsustainable creditdriven growth (Smith and Swain, 2010; see also Bianchi, 2009, for an account of intra-European evolutions and their global context). This record compares particularly unfavourably with that of China, which chose a fundamentally different development path from the European ex-communist states: instead
of shock therapy, which Vaclav Havel sought to justify with the claim that you cant cross a chasm in two small steps, the Chinese chose a gradual and experimental approach to reform and opening up captured in Deng Xiaopings aphorism that (to paraphrase) the way to cross a river is step by step feeling for the stones as you go (see Nolan, 1995, and Burawoy, 1996, for a comparison of the Soviet/East European and Chinese development models). The remarkable growth of China at an average of 8.3 percent per year since 1980 is one of the reasons for the growth of Asia at 6.2, 5.1, 5.4 and 5.9 percent per year in the four cycles from 1960 until 2008, with the growth in the Tiger economies slowing down during the 1990s. As for the other parts of the world, high growth rates in 196073 gave way to much slower growth in 197389, especially in the economies of
Dunford and Yeung

0.1 0.08 0.06 0.04 0.02 0 0.02 0.04 0.06 19601973 19731989 19891997 19972008
27
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Eu
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Figure 2. Average annual rates of GDP growth measured in 1990 US$ converted at Geary-Khamis PPPs over several successive economic cycles
Source: Elaborated from Groningen Growth and Development Centre (2009).
Latin America and Africa. Just as the differences in the performance of European transition economies and China reflect in part different development choices, so do the contrasts between Asian and Latin American and African economies: the latter implemented the Washington Consensus and subsequently the enhanced Washington Consensus (which required that the original goals of stabilization, liberalization and privatization be accompanied by governance reforms and country ownership), whereas countries such as Japan and the Four Tigers, and later on China, India and Vietnam, violated virtually all of the rules of neoliberalism. The recent rapid growth of very populous countries in Asia is already having profound effects on global inequality and on the context for global development, as indeed are some of the recent changes in
W es
the political complexion and the economic strategies of Latin American economies and the naturalresource-driven growth of Russia. Table 1 records shares of world GDP for a number of areas. The data are derived from the International Monetary Funds Balance of Payments Statistics. These data include forecasts up to 2014. These forecasts were extended to 2020 assuming a continuation of trends since the start of the millennium. According to these data, in 1980 North America, Australia and New Zealand accounted for 26 percent and Western Europe for 27 percent of world GDP. These figures will fall to 22.8 percent and 19.3 percent respectively in 2010. Oiland gas-producing countries accounted for another 8.3 percent in 1980 and 12.8 percent in 2010. The forecasts in Table 1 indicate a further fall for Europeansettled countries and for Western Europe to 18.8
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Table 1. GDP at PPP as a share of the world total (percent) 1980 Australia and New Zealand North America Western Europe East and South East Europe CIS and Mongolia Greater China Rest of East Asia South East Asia Southern Asia Middle East and North Africa Pacific Sub-Saharan Africa Western Hemisphere 1.4 24.6 27.0 3.6 8.0 2.8 9.1 2.3 2.9 5.6 0 2.5 10.2 1990 1.3 24.8 25.3 3.0 7.8 4.7 10.3 2.9 3.7 5.3 0 2.2 8.6 2000 1.4 25.6 23.8 2.6 3.6 8.7 9.4 3.6 4.7 5.6 0 2.1 8.8
2005 1.4 24.2 21.7 2.7 4.2 11.0 8.8 3.8 5.3 6 0 2.3 8.5
2010 1.3 21.5 19.3 2.8 4.7 14.3 7.9 4.1 6.3 6.4 0 2.6 8.7
2015 1.2 19.7 17.4 2.8 5.0 17.7 7.3 4.3 7.1 6.4 0 2.7 8.4
2020 1.1 17.7 15.0 2.8 5.5 21.7 6.4 4.5 7.9 6.6 0 2.9 7.9
Source: Elaborated from data from IMF (2008).
percent and 15 percent respectively in 2020. Over the same period, the share of Greater China (Peoples Republic of China, Hong Kong, Macau and Taiwan) increases from just 2.8 percent to 21.7 percent while the share of Asia as a whole rises from 17.1 percent to 40.1 percent. These forecasts are of course tentative. In particular, they do not reflect the possibility that the recent improvement in growth in the western hemisphere, made up mainly of Latin American countries, will be sustained. What these figures show, however, is that a continuation of recent trends will in quite a short space of time see Chinas per capita income reach the world average and will see large increases in the relative economic weight of emerging economies in Asia at the expense of the economically advanced parts of the world.
The elusive quest for western growth: From the crisis of Fordism to the financial crisis
As Figure 2 shows, rates of growth in the developed world have failed to match the growth rates of the Golden Age that came to an end in the Fordist crisis of the late 1960s and 1970s. In the 1980s it was widely held that a solution to the economic difficulties lay in the emergence of a number of new development models whose relative merits were reflected
in the comparative economic dynamism of the economies strongly associated with them: Piore and Sabel (1984) saw the flexible specialization of Italys industrial districts and of German regional economies as marking a second industrial divide; the Japanese model of lean production and the Japanese and German models of economic organization were seen as the drivers of the export competitiveness of Japanese and German industries and the superiority of Japanese and German variants of capitalism. These success stories of the 1980s gave way, however, to economic crises in the 1990s: Japan found itself trapped in a prolonged phase of economic stagnation marked by economic recession, commodity and asset price deflation, many bankruptcies and high unemployment, while the German economy stagnated as it sought to absorb the former German Democratic Republic. In the 1990s, new hopes were vested in the rise of the new economy. These hopes derived from two factors. The first was the perception of the new economy as the source of a new set of radical Schumpeterian innovations. The second was the relatively fast productivity growth of the US and a number of other economies with strong specializations and strong records of innovation in (1) information and communication technologies (ICTs), and (2) the commodification of knowledge and the development of information goods. These sectors
Dunford and Yeung grew rapidly in the USA and in countries such as Ireland that copied the US model, although growth also occurred in Nordic countries with quite different institutional configurations. In spite of the fact that the new economy was successful in countries not modelled on the USA, it was generally conceived as a combination of constant innovation in ICT sectors and US-style institutions and economic governance. An institutional architecture conducive to the development of ICTs was accordingly considered as comprising at least three elements. The first was market liberalization and deregulation, which were seen as providing for non-cyclical and competitive markets. In practice, cyclical movements were amplified and many of the characteristics of these sectors lent themselves to oligopolistic structures. The second was reliance on market financedriven capitalism. Market-driven finance interacted with ICT sectors through the provision of venture capital, stock market quotations to raise funds or, more usually, to appropriate innovation rents, and the use of shares to finance mergers and takeovers, while the ICT sectors provided market finance sectors with essential information-handling resources and technologies. The third was a model of corporate governance centred on the maximization of shareholder value. Economically, the ICT sector made a significant direct contribution to output and productivity growth. Any increases in volume were, however, offset by a decline in the hedonic price index owing to the rise in quality and the fall in production costs of ICT products. These and other characteristics of ICT sectors make it questionable whether ICTs are capable of creating new sectors that are sufficiently important to increase productivity and profits and to generate sustained growth at a macroeconomic level. Certainly in the case of the USA, the growth of the economy was as much a result of a sustained cyclical upturn and of the finance-driven growth model itself. In March 2000, the limits of this model were made clear with the dotcom crash: a stock market collapse, consequent capital losses of 5080 percent and a subsequent wave of bankruptcies and scandals. This crisis was in part a financial crisis whose roots lay in a regime of corporate governance controlled by the stock market and in the existence of a
29 reflexive community of investors with self-realizing expectations detached from real prospects of profitability: expectations of price increases stimulated investments that drove up prices. Nevertheless, it also put into perspective the scope for ICTs, notwithstanding their pervasiveness, to act as a new engine of growth. In the eyes of one critic, the new economy ha[d] already joined lean production in the museum of innovations that were once supposed to leave an indelible print on the twentieth century but whose effects were in fact frittered away after only one or two decades (Boyer, 2004: 149). The North American and United Kingdom (UK) economies recovered remarkably quickly from the dotcom crisis. In the Euro zone, conversely, stagnation prevailed. In the USA, the UK and Canada, monetary authorities chose to avoid financial deflation and to protect corporate profitability by reducing interest rates and raising asset values. As a result, in Anglo-America an expanding housing market bubble helped compensate for the collapse of a stock market bubble, very limited corporate investment and weakness of growth of real household earnings. In the Euro zone, conversely, stagnation prevailed: companies that contracted high debts at high longterm interest rates in the late 1990s to acquire, for example, US new economy assets faced falling asset values, and were unable to free themselves of debt owing to the absence of expansionary monetary and fiscal policies and declining private sector demand. The contrasting growth records of these two sets of economies enabled the leaders of Anglo-American economies (the USA, the UK, Ireland and in some respects Iceland) to proclaim the superiority of their finance-led model of development, though in practice it was completely unsustainable and ended in the deepest financial crisis since the 1930s. The model itself rested on the interaction of several mechanisms. The first was the creation of a housing bubble (a sub-prime bubble in the USA) that generated unearned incomes that the beneficiaries could spend in often increasingly unequal societies. The second was securitization. The third was leverage. The fourth was a set of mechanisms that transmitted the crisis from the financial sector to the real economy. Each of these mechanisms will be examined in the next few paragraphs.
30
40,000 Average real income of 099 percentile (2000 $) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1917 1927 1937 1947 1957 1967 P099 Average

800,000 700,000 600,000 P99100 Average 500,000 400,000 300,000 200,000 100,000 1977 1987 1997 0 Average real income of top percentile (2000 $)
Figure 3. Real household income of the 099 percentile and the top percentile in the USA
Source: Piketty and Saez (2003).
At the centre of the wave of Anglo-American growth in the early years of the new millennium was a strong increase in consumer demand. This increase in demand occurred in societies in which there had been strong increases in inequality and very slow growth of average household real earnings (Piketty and Saez, 2003). In the case of the USA, the average income of the 99 percent of US households with the lowest incomes rose only from US$34,050 in 1972 to US$34,209 in 2002 (Figure 3). More generally, there were significant declines in the wage share of income (Perrons, 2010). In this situation, what fuelled consumption was a remarkable decline in savings rates, a recourse to credit and exceptionally high levels of indebtedness: unearned income from property investments and credit, often from overseas lenders, drove growth. An important driver of Anglo-American growth was an explosion in the supply of loans as a result of the monetary policy of the authorities, credit liberalization and the inflow of savings from the rest of the world. House prices increased sharply relative to earnings, and relatively low-income and potentially insolvent households were encouraged to take out sub-prime loans. More generally, large numbers of households cashed in on or refinanced house purchases in order to withdraw equity to finance expenditure. Household debt of all kinds increased substantially (Figure 4). In 20067, a moderate decline in US house prices and a small rise in interest rates saw the emergence
of serious repayment problems. Households were unable to make repayments or to refinance loans, defaults and foreclosures/repossessions rose dramatically and the re-sale of repossessed homes exacerbated the situation by driving prices down further. The crisis in the housing market set in motion a global financial crisis that, in the absence of massive state intervention, would have paralysed the international bank liquidity market. The reason a crisis in just one part of the housing market could have such dramatic effects was a result of two other phenomena: securitization and leverage. Securitization was a change in the credit model from a traditional model in which banks made loans and held on to them until they were repaid to a model under which loans are made, repackaged and sold on as low-risk investment products (Table 2 and Aglietta, 2008). In order to expand their capacity to offer credit and to increase earnings, private investment banks applied securitization not just to relatively secure loans but also to risky sub-prime mortgages. At the same time, bank balance sheets were expanded using funds borrowed from wholesale markets rather than from their deposit base. The property market downturn resulted in the failure of loans and a sharp decline in the value of securitized assets. This decline in asset values itself had an adverse effect on the value of the securitized products sold by investment banks.
Dunford and Yeung

180 160 140 120 100 80 60 40 20 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
31
Household debt as a share of disposable income (%)
United States United Kingdom Euro zone
Figure 4. Household debt as a share of household disposable income
Sources: UK: Office for National Statistics (ONS), the Federal Reserve and Eurostat.
Leverage saw this decline in the value of securitized products lead to the collapse of a number of investment banks and the paralysis of financial markets. In the specific case of the securitized assets (mortgage loans) that underpinned the financial crisis, the assets themselves were moved from bank balance sheets to special investment vehicles/conduits that sold securities to investors. As Aglietta
(2008) points out, the liabilities of these special investment vehicles were highly leveraged shortterm bank debt and commercial paper. As soon as the securitized assets could not be sold owing to investor concern about the risks involved, the special investment vehicles could not refinance their commercial paper except at much higher rates of interest. At the same time, the value of these assets could
Table 2. From the sub-prime crisis to a generalized credit crisis: two models of credit Initiate and hold Lenders profit is an increasing function of risk borne Incentives to assess the solvency of borrowers Information asymmetry is contained by proximity of borrower and lender, who monitors the loan during execution of the contract Credit supplied by banks with expertise in credit risk assessment Prudential control: capital provisions modulated on credit risk tails
Source: Aglietta (2008).
Initiate and distribute (or sell the risk) Lenders profit is an increasing function of sales of credit Incentive to sell credit against collateral Information asymmetry is magnified by the weak incentive of the initiator to value the risk of the borrower Credit supplied by both banks and unregulated private firms No prudential control, no capital provision
32 not be established so that the distribution of losses was unknown. Along with a desire to conserve cash to meet their own regulatory requirements and those of special investment vehicles, this uncertainty about asset values led banks to stop lending to one another. The result was a liquidity crunch in the inter-bank market. Insurance companies that should have provided some cover against defaults were unable to deal with the scale of the problem and some were subsequently bankrupted. On 7 August 2007, central banks intervened to prevent the collapse of the financial system. The financial crisis itself affected some economies far more than others. Most adversely affected were those Anglo-American economies that had pursued the path of finance- and debt-driven growth (the USA and the UK, as well as some smaller economies such as Ireland and Iceland). This path was associated with a high degree of financial market depth driven by especially high values for debt securities (Figure 5): in 2006, the economies with the greatest financial depth measured by the value of financial assets as a share of GDP were the Netherlands, Japan, Singapore, the UK, the USA and Spain. China also
European Urban and Regional Studies 18(1) had a high share but it derived from a very high share of bank deposits, a significant share of equity securities and a very small share of corporate bonds and debt securities. Japans high share reflected a high level of government debt. The USA conversely was characterized by a very high share of debt securities, along with Ireland, Iceland, Spain and the Netherlands (McKinsey Global Institute, 2008a, 2008b). The impairment of financial markets was finally rapidly transmitted from the organizations, sectors and countries most directly responsible for it to other spheres of economic life and other countries. The outcomes varied across financialized economies themselves, commodity-producing economies, and export-oriented economies. Transmission involved several mechanisms. The first was a financial decelerator. On the supply side, declining asset values reduced the value of collateral and confidence, which in turn reduced the availability of credit. The reduction in the availability of credit was exacerbated by the funding difficulties of the financial sector. On the demand side, the fall in the value of assets reduced creditworthiness and rates of return on investment,
500 450 400 350 300 250 200 150 100 50 0 Equity securities Private debt securities Government debt securities Bank deposits
Assets as a share of GDP in 2006
Japan
United States
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Euro zone
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India
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Figure 5. The depth of financial markets: Assets as a share of GDP in 2006

Source: Elaborated from data in McKinsey Global Institute (2008a, 2008b).
Dunford and Yeung driving down borrowing. The result was a vicious circle. The second mechanism was the depressive effect of the decline in wealth on consumption and investment and on commodity, energy and food prices, resulting in falling terms of trade for commodity exporters. This reduced foreign direct investment and the demand for imports and therefore for the exports of export-oriented economies such as those in East Asia. The East Asian and German economies suffered a veritable export implosion. In China it was estimated that up to 30 million migrant workers employed in east coast export industries initially lost their jobs. The results
33 were slower growth and employment decline, which adversely affected income and growth, setting in motion another vicious circle.
Asymmetric globalization
These models of western growth intersected asymmetrically with the development models of emerging economies to generate a further set of effects that have profound implications for comparative development. Three sets of evolution were of particular importance.
100 Share of world manufacturing output (%) 90 80 70 60 50 40 30 20 10 0 1750 1830 1880 1913 1928 1953 1973 1995 Japan China India and Pakistan Rest of non-European world
100 Share of world manufacturing output (%) 90 80 70 60 50 40 30 20 10 0 1750 1830 1880 1913 1928 1953 1973 1995
UK Germany US Russia and USSR Rest of Europe and its offshoots
Figure 6. A second industrial divide
Source: Elaborated from data in Bairoch (1997).
34 The first was the hollowing out of manufacturing in financialized economies and the consequent emergence of a new industrial divide (Figure 6). This new industrial divide stems from, on the one hand, significant growth of industrial capabilities in emerging economies and, on the other, an extraordinary recomposition of corporate profits in financialized economies: in the USA for example, in 2003 the financial sector accounted for 34.8 percent of US corporate sector profits and the manufacturing sector accounted for just 7.8 percent, compared with around 55 percent in the early 1950s (Dunford, 2005: 1567). This shift in the geography of industrial activities opened the way to a second phenomenon: the emergence of ever-increasing trade imbalances in the global economic system (Figure 7). These everincreasing imbalances were in part a reflection of shifting relative competitiveness and of the offshoring of manufacturing operations by international
European Urban and Regional Studies 18(1) corporations to export zones in emerging economies such as that of China. These trade imbalances were also associated with a third phenomenon. More specifically, the extent of debt-fuelled growth of some advanced economies was itself possible only because of the existence of a set of complementary flows of savings from emerging to rich economies. The US and UK trade/ payments deficits with the rest of the world and China were possible only owing to the inflow of foreign savings. China, for example, purchased US Treasury Bonds to manage its exchange rate vis-vis the currencies of its major trading partners and to accumulate reserves should it need to protect itself against speculative attacks. Capital controls were also employed to prevent speculative inflows that might force up its exchange rate and reduce the value of its dollar holdings. In 2009, Chinas foreign reserves hit US$2.4 trillion: in effect, China was
1,500,000
1,000,000
Western hemisphere Sub-Saharan Africa
Current account balance (US$ million)
Pacific 500,000 Middle East and North Africa Southern Asia South East Asia 0 Rest of East Asia Greater China (HK, M, T) CIS and Mongolia 500,000 East and South East Europe Western Europe North America
1,000,000
Australia and New Zealand
1,500,000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 7. Current account balance, 19982008
Source: Elaborated from data in International Monetary Fund, various years. Note: Greater China: Peoples Republic of China, Hong Kong, Macau, and Taiwan.
Dunford and Yeung helping finance the expenditure of US consumers while Chinas healthcare, education and social safety nets were short of funds.
35 that point, the number of economies that achieved relatively high levels of affluence were few in number and size. Of the economies that sought to acquire, adopt and develop advanced technologies and that set out on the path of closing their productivity gap with the advanced economies, relatively few were successful. Although there were growth spurts, sometimes lasting many years, most failed to sustain high rates of growth over the long run and therefore remained relatively underdeveloped. In the last 30 years, however, that situation has started to change, largely because two Asian giants, China and India, have started to achieve sustained high rates of growth. In each case, the nature of the underlying transformations are similar: largely rural and agrarian societies are transformed first into urban and industrial societies. These transformations in every case generate profound structural difficulties and conflicts as rural populations are uprooted, as agricultural productivity increases, as cities grow and as new technologies and ways of life are generalized. As Figure 8 also shows, however, the speed of these changes has accelerated. To achieve a five-fold increase in its initial real GDP per capita, it took the UK more than 160 years, Germany more than 108 years, the USA more than 100 years and Japan more
The rise of China

In the last 250 years most inhabited parts of the world have experienced at one time or another increases in their rates of economic growth. One of the factors that distinguishes economically advanced economies from the rest of the world is their capacity to sustain relatively high rates of economic growth over relatively long periods of time (see Figure 8). As Figure 8 shows, the UK (or rather a set of UK industrial regions plus its political, commercial and financial capital) was the first modern industrial economy. Its modern economic growth started some 230 years ago. Subsequently it was joined by a number of other European countries, of which the most important was Germany, and a series of white settler territories (North America, Australia and New Zealand). Not until the Meiji Restoration did a nonwestern economy (Japan) embark on modern industrial growth. After the Second World War it was joined by four small Asian Tiger economies. Up to
35,000 30,000 GDP per capita (1990 US$) 25,000 20,000 Japan (1885) 15,000 10,000 5,000 0 China (1978) India (1982) South Korea (1966) Hong Kong (1962) Taiwan (1958) Singapore (1960)
United States (1840)
United Kingdom (1780)
Germany (1850)
20
40
60
80
100
120
140
160
180
200
220
Years since take-off
Figure 8. Economic growth trajectories since take-off

Source: Elaborated from data in Maddison (2008).
36 than 75 years. A similar increase took South Korea just over 22 years, Hong Kong just over 28 years, Taiwan just over 24 years and Singapore just over 26 years. China also took just over 25 years, but in this case transforming the lives of some one-fifth of the worlds population. Not only did the speed of change accelerate, compressing what took centuries into a few decades, but the scale of change was completely unprecedented. Chinas economic growth especially has been capital intensive, partly as a result of massive central government investment in physical infrastructure and urban construction. Gross fixed capital formation (GFCF) has accounted for at least one-third of the GDP in China since the late 1970s. In 2004, its share of GDP exceeded that of household consumption (Figure 9). In 2007, GFCF accounted for more than 42 percent of GDP; household consumption accounted for just 35 percent. Exports have also played an important role in Chinas growth, though net exports account for less than 10 percent of GDP.
European Urban and Regional Studies 18(1) Chinas growth has seen a remarkable decline in poverty as defined by the World Bank (Chen and Ravallion, 2008). In 1981, 1515 million people in the world and 730 million in China lived on less than Purchasing Power Standard (PPS) $1 per day. In 2005, the world figure stood at 876 million and the Chinese figure at just 106.1 million. Almost the whole of the global decline in poverty (639 million) was attributable to the decline in China (623.9 million). Chinese growth has, however, generated a series of major internal and external imbalances whose rectification is a condition for further sustained growth. Internally, Chinese growth has led to resource depletion, environmental damage, social inequality and increasing gaps in development between the highly developed east coast and the centre, north-east and west, on the one hand, and between urban and rural areas, on the other, with urban net per capita income standing in 2009 at 3.33 times that of rural areas (NBS, 2010). Externally, Chinese growth has generated high levels of demand for natural resources,
Figure 9. Composition of Chinas GDP, 19782007

Source: Elaborated from NBS (various years).
Dunford and Yeung significant amounts of pollution and growing trade surpluses with the USA and the European Union. As a major exporter, China was affected very adversely by the transmission of the financial crisis to the real economy. The immediate response of the Chinese government was a massive fiscal stimulus. The success of any set of reforms will also depend, however, on the capacity of China to alter its model of development in a direction that will permit environmentally sustainable growth and the integration of its potentially massive domestic market to open the way to a model of more inward-oriented growth. A movement in this direction implies increased farm productivity and rural incomes as well as increased extra-agricultural employment to reduce the rural/ urban divide, relatively rapid income growth in the economically underdeveloped north-east, centre and west of the country, and improved social protection permitting a reduction in savings rates. Although Chinas recently adopted harmonious society concept represents an ambition to move in these directions, the success of this type of transition depends on a series of much more concrete measures, of which the recent fiscal stimulus is an example. In the remainder of this paper we shall therefore examine Chinas fiscal stimulus plan, considering in particular what it reveals about the structural weaknesses and potential strengths of the Chinese economy and the extent to which it represents a move in the direction of a new model of development and sustainable future growth. The Chinese governments RMB4 trillion (US$586 billion) stimulus plan was announced in November 2008. The plan focused on 10 major areas, including low-income housing, rural infrastructure, transport, health and education, energy and the environment, technological innovation, and the post-earthquake reconstruction in Sichuan, and aimed to counter the global recession and improve the longer-term competitiveness of the economy (Table 3). The central government contributed 29.5 percent of the total budget. The remaining RMB2.82 trillion will come from local government financing (including bond issuance) and bank lending (World Bank, 2009a: 1718). In this paper we shall focus on the potential impacts of five specific aspects of the stimulus programmes that relate to the medium-term reshaping of the model of development: physical infrastructure;
37 R&D capacity and energy efficiency; export-oriented industries; education and social welfare; and consumer expenditure.
Physical infrastructure and the volatility of capital flows

The most striking feature of the 10-point stimulus plan is the fact that a series of massive infrastructureoriented projects account for almost one-half (46.75 percent, of which 9.25 percent is for rural infrastructure) of the budget (Table 3). This RMB1500 billion investment in physical infrastructures provides a short-term capital injection into the iron and steel, cement, and other construction-related sectors. In addition, it should have beneficial long-term effects on the economy by relieving bottlenecks in the heavily used rail network and by increasing electrical energy network capacity. The RMB370 billion investment in rural development mainly comprises physical infrastructure projects in rural areas, such as the construction of 20,000 kilometres of roads. These projects should improve the accessibility of remote villages in inland provinces. In contrast to previous government infrastructure investment aimed to meet industrial needs, some projects are geared toward the long-term developmental goals of improving the living standards of the general public. An important example is the plan to improve access for 50 million people to clean drinking water, which will help raise the health and living standards of poor households. The Chinese governments expansionary fiscal and monetary policies are already helping to offset the economic impact of the global recession. Early indications are that subnational governments are well disposed to these massive investment programmes, partly because they can easily secure preferential loans from state-owned commercial banks (SOCBs) (see Yeung, 2009b, for lending criteria in SOCBs). The rapid response of subnational authorities, the lifting of credit quotas and the lowering of SOCBs reserve ratios from 17.5 percent to 1415 percent by the Peoples Bank of China (World Bank, 2009b), along with the lowering of the equity requirement of fixed asset investments by the central government in May 2009, all contributed to a frantic
38
Table 3. Chinas 10-point stimulus programme, 200810 Categories:
Overall financing RMB billion Percent 37.50
Public infrastructure Railways Electricity networks Water supply 445 km of highways 100,000 m2 of airport terminal buildings Social welfare 864,000 units of public housing for low-income households 9.7 billion yuan distributed to 74 million poor people on minimum living allowance, unemployed or receiving financial assistance Rural development Electricity Access to safe drinking water for 50 million people 120 large hydrological projects 20,000 km of roads Technological innovation 176 high-tech R&D projects to improve competitiveness in 10 vital industrial sectors Energy and the environment Renewable energy Water and sanitation facilities Sewage treatment plants 15 million mu of forest restoration Healthcare, education and culture 20 billion yuan for 6500 healthcare construction projects, including 986 county-level hospitals, 3549 township health centres, and 1154 community health centres Building schools (1.26 million m2) and hospitals Post-earthquake reconstruction in Sichuan Total
1500
400
10.00
370
9.25
370
9.25
210
5.25
150
3.75
1000 4000
25.00 100.00
Sources: Compiled from Zhang (2009); China Daily, 3 July 2009. Note: Healthcare and education accounted for only about 1 percent and infrastructure accounted for a larger share in the original November 2008 stimulus plan.
rate of credit expansion. SOCBs lent RMB7.37 trillion (US$1.08 trillion) in the first half of 2009, nearly double the total loans extended in the whole of 2008 (CBRC, 2009b). Although this massive monetary injection, along with the expansionary monetary policies, will fuel economic growth in the coming quarters, the stimulus nevertheless also carries certain risks. One is a possible increase in the value of non-performing loans of
SOCBs. At the end of 2009, the non-performing loans at SOCBs stood at only 1.8 percent (RMB357 billion), and the provision coverage ratio of 163 percent was higher than the 150 percent stipulated by the China Banking Regulatory Commission (CBRC, 2010). A lending spree by the SOCBs could, however, lead to cost-inefficient infrastructure projects if growth-oriented local government officials insulated from risks (moral hazard) secure funds for projects in the absence
Dunford and Yeung of careful financial viability studies, if officials seek to exploit rent-seeking opportunities or if state-owned enterprises secure preferential bank loans and government contracts. In all of these cases, the long-term cost effectiveness of projects may be questionable. A second concern is that a combination of a substantial increase in liquidity and minimal upward pressure on interest rates on the one hand and a lack of local investment avenues and central government capital controls on the other carry the risk of excess liquidity, a misallocation of credit, asset inflation (and subsequently asset bubbles) and an inflow of speculative capital, adding to the risk of an ultimate rise in non-performing loans among SOCBs. According to Wei Jianing, the deputy director at the National Development and Reform Commission, about half of new bank lending in the first half of 2009 was devoted to physical infrastructure projects and the other half was diverted into the stock and property markets (China Daily, 13 July 2009). Senior Chinese regulatory officials are aware of the potential danger of rapid credit expansion in China. The chairman of the China Banking Regulatory Commission (CBRC), Liu Mingkang, said publicly that the rapid and imprudent expansion of bank loans in the first half of 2009 increased the possibilities of financial defaults owing to the financial risks of investment projects, the concentration of loans and the overheated property market (Liu, 2009). Subsequently, the CBRC ordered SOCBs to ensure new loans are channelled into the real economy rather than diverted into equity or real estate markets (CBRC, 2009a). Yet another risk is that price increases in equity and property markets in China, coupled with historically low interest rates in most developed countries, could drive up commodity prices and encourage an inflow of foreign capital into China. A possible result is higher bond market interest rates and slower economic recovery in developed countries, weakening demand for Chinese products in major overseas markets. The inconvertibility of the Chinese currency and Chinas massive US$2.4 trillion foreign exchange reserves act as a temporary safety barrier in the face of the volatility of capital flows and boom-and-bust cycles, but the Peoples Bank of China could have difficulties in mopping up the excess foreign exchange to maintain the pegged exchange rate of its currency.
39
R&D capacity and energy efficiency

Although infrastructure investments represent in some ways an extension of Chinas earlier model of development, the plan also includes ambitious energy generation targets that envisage a strategic shift to the use of non-fossil fuels in line with the recent move in the direction of harmonious development. To reduce its 2005 carbon intensity by 45 percent by 2020, China plans a significant reduction in its reliance on coal power generation in the next decade: coal accounted for 76 percent of power capacity in 2008, but is expected to fall to 55 percent by 2020 and 37 percent by 2050 (He and Zhang, 2005: 89; China Daily, 22 February and March 2010). More specifically, the plan envisages subsidy and pricing schemes to improve energy generation and transmission efficiency, harness renewable energy and increase renewable energy R&D capacity, with the ultimate goal of developing a completely renewable energy supply chain in China. In China, renewable energy industries have grown rapidly since their inception in the 1980s. China has been the largest global supplier of solar photovoltaic (PV) panels since 2007. After the adoption of provisions for a favourable tax status for alternative energy investments in the 2005 Renewable Energy Law, wind turbine installed capacity doubled every year, reaching 25.1 gigawatts (GW) by the end of 2009. China overtook the USA as the worlds largest market for wind turbines in 2009 (Li et al., 2008; GWEC, 2010; China Daily, 31 January 2010). To harness and support the development of renewable energy, the central government plans to establish a massive 11,950 megawatt (MW) renewable energy park in Ordos City of Inner Mongolia: 6950 MW from wind farms, 3900 MW from photovoltaic power plants, 720 MW from solar thermal farms, 310 MW from biomass operations, and 70 MW from hydro-storage (International Herald Tribune, 9 September 2009). However, potential trade disputes and an inefficient use of resources could slow down or even derail the long-term development of renewable energy sectors in China. First, although China has yet to sign the World Trade Organization (WTO) side-agreement on government procurement, other
40 WTO members allege that foreign-financed firms in China are disadvantaged in the competition for government orders. For instance, Chinese local content policy required that companies tendering for its first solar power plant in 2009 produce at least 80 percent of equipment in China. In 2008, China accounted for about one-third of global production of solar cells, and about 95 percent of its output was exported to the USA and Europe (China Daily, 19 August 2009). With 30 percent lower production costs, Chinese PV manufacturers could in the years to come squeeze out the major German PV manufacturers, as it costs Ersol (Germany) US$1.01 per watt to produce a solar cell, compared with just US$0.35 per watt for Suntech (China) (The Straits Times, 19 August 2009). Moreover, in 2009 the Chinese government banned the installation of wind turbines with a capacity of less than 1000 kilowatts (kW), in effect excluding the 850 kW designs popular with European manufacturers from the booming Chinese market (International Herald Tribune, 13 July 2009). Second, Chinas renewable energy standards for local power companies can also have some unexpected consequences. A September 2007 central government directive stipulated that large power companies must generate at least 3 percent of their power from renewable sources other than hydroelectric sources by the end of 2010. This figure will reach 8 percent by the end of 2020. As the standards dictate only the proportion of generating capacity rather than the actual amount of electricity that has to be generated from renewable sources, profit-maximizing Chinese power companies have an incentive to buy the cheapest wind turbines available locally to increase their renewable energy generation capacity. Chinese power companies still prefer the locally made turbines even if they break down more frequently, produce less electricity (partially owing to the poor connection between turbines and electricity grids) and have comparable lifecycle costs to those of European turbines (International Herald Tribune, 13 July 2009).
European Urban and Regional Studies 18(1) government adopted a comprehensive revitalization plan to improve the competitiveness of 10 industrial sectors. In addition to preferential banking policies for the prioritized light and heavy industries (textiles and clothing, electronics and information, machinery and shipbuilding, and other sectors), increased VAT rebates and the decision to allow capital spending to be deducted from VAT should improve the cash flow of export sectors. In the event, export industries suffered from the recession but the impact should be put in a wider perspective. According to the General Administration of Customs (GAC, 2010), export value decreased by 16 percent year-on-year to US$1,201.66 billion in 2009. Nonetheless, the exceptional growth in export value since China joined the WTO in 2001 must be taken into consideration. Between 2002 and 2007, the average annual growth rate of Chinas export value was 29 percent, which was 10 percentage points higher than the corresponding growth rate since 1978 (NBS, various years). This period of exceptional international trade growth coincided with rapid global economic growth and generated a US$629.3 billion trade surplus for China. A double-digit drop in total export value is costly for export-oriented manufacturing firms, and 2542 foreign-owned companies in Guangdong closed in 2008 (China Daily, 31 August 2009), laying off up to 30 million migrant workers in coastal provinces, but this decline only brought export value back to the 2007 figure of US$1218 billion. Therefore, the merchants of gloom may be too pessimistic in their assessment of the future for Chinese export industries. To counter declining exports, a number of firms turned their attention to the domestic market, although for some their room for manoeuvre is limited by product and consumer taste specificities and the limited extent of the domestic market (see below). In the clothing and furniture sectors, for example, product sizes and styles are region and market specific. An example is the way the cancellation of orders by overseas buyers resulted in stockpiles of oversized cashmere sweaters in China: because the sweaters were tailored for US and European customers sizes, Chinese manufacturers can sell only S size sweaters locally (International Herald Tribune,
Export-oriented industries
To soften the impact of the recession on exportoriented industries, in January 2009 the Chinese
Dunford and Yeung 20 June 2009). Export sectors are path dependent. Costly investment to develop different designs at lower costs or even new product lines may be required before manufacturers can exploit the domestic market, with its razor-thin profits margins.
41 in China of local governments for a much larger share of spending than in most other countries have yet to be resolved. Nor at present are there adequate institutional arrangements for channelling resources from rich to poor areas so as to guarantee minimum levels of public service provision (World Bank, 2009b: 14). Second, hospital and clinic construction per se will not improve the accessibility of healthcare. The share of pharmaceutical expenditure relative to total health expenditure in China was about 45 percent in 2003, compared with just 15 percent in OECD countries (Financial Times, 19 August 2009). As rural drug sales account for nearly 50 percent of health centre revenues, healthcare reform will succeed only if the widespread practice of prescribing unnecessary drugs and treatments to finance the medical sector is overhauled (see Wagstaff et al., 2009). Admittedly, the Ministry of Health has worked with the National Development and Reform Commission to finance the operation of all hospitals and health centres in China. To address high medical costs, the central government plans to purchase and distribute hundreds of essential medicines centrally at listed prices to patients (China Daily, 27 February 2010). At present it is too early to assess the potential impacts of such plans on the accessibility of healthcare in China. What is clear is that the population is ageing (in 2007 the dependency rate was 37.42, with 9.36 percent of the population aged 65 and over) and the ratio of retirees (with basic pension insurance) to workers is increasing (in 2007 the ratio was about 1:4) (NBS, 2008). Combined with the aforementioned unresolved issues, these demographic trends will have long-term financial implications for the healthcare and welfare systems.
Healthcare, education, housing and social safety nets

Healthcare, education and social welfare account for 13.75 percent of the stimulus plan budget, of which RMB400 billion is earmarked for improving social welfare (Table 3). The social welfare project includes the construction of 864,000 units of public housing for low-income households. To encourage property developers to build low-cost housing, in May 2009 the central government reduced the property developers minimum capital fund requirement from 35 percent to 20 percent of the entire investment. In addition to the three-fold increase in the original health and education budget, in January 2009 the State Council injected a further RMB850 billion (US$123 billion), including RMB331.8 billion from the central government, into the health system. This new spending plan aims to improve healthcare and to provide basic medical care for more than 90 percent of the total population by 2011 (World Bank, 2009a: 17; China Daily, 9 August 2009). To achieve the target of at least one standardized county-level hospital and several qualified township health centres in each county, the Ministry of Health announced in July 2009 that it would spend RMB100 billion (US$14.7 billion) to build and equip 10,000 grassroots medical institutions by 2011. This investment is in addition to RMB20 billion allocated for the construction of thousands of hospitals and health centres in the stimulus plan (Table 3; China Daily, 3 July and 9 August 2009). These ambitious investment plans will obviously improve healthcare provision and social safety nets for the poor in China but do not resolve the issues of finance and accessibility. First, it is not certain that these investment projects will secure the necessary financial support from local governments. The longstanding issues relating to the adequacy of intergovernmental fiscal transfers given the responsibility
Capacity of the consumer economy

To stimulate private consumption and channel the products of depressed export sectors towards the domestic market, central and local governments have implemented a series of policies, including subsidies for private consumption of selected commodities and the issue of consumption vouchers. Under the rural household purchasing subsidy scheme, each household is eligible for a subsidy of
42 13 percent for the purchase price of appliances from their local township governments between February 2009 and 2012. The central government will provide 80 percent of the subsidy and the remaining 20 percent is financed by local governments (World Bank, 2009a: 18). In addition to reducing retail taxes by one-half to 5 percent on small cars with an engine capacity of 1.6 litres or below, the government earmarked RMB5 billion (US$730 million) for a financial subsidy to encourage private owners to upgrade ageing and polluting vehicles. According to the National Bureau of Statistics (NBS), the per capita consumption expenditure of Chinese urban residents reached RMB5979 (US$875) in the first half of 2009, a year-on-year increase of 8.9 percent (10.3 percent in real growth after deducting price factors) (NBS, 2009a). Year-on-year retail sales rose 15.1 percent in the first eight months of 2009, to reach RMB7876 billion (NBS, 2009b). Available evidence suggests that the automobile subsidy scheme has achieved a certain degree of success. In 2009, Chinas automobile production and sales reached 13.5 million units and became the largest market in the world. The Ministry of Commerce also envisaged the replacement in 2009 of 2.7 million vehicles by new ones with lower fuel consumption of nearly 510 percent, improving environmental conditions (China Daily, 15 July 2009 and 10 February 2010). The economic impact of these schemes depends in part on their continuation and therefore in part on the discretion of local government officials who have to part-finance these initiatives. The capacity of the consumer market to support rapid growth without further large government subsidies is in doubt. At present China is not a large consumer economy, although in absolute terms the middle class is huge. It is estimated that the number of households with more than US$1 million in liquid assets in China increased from 124,000 in 2001 to 310,000 by the end of 2006. China is actually ranked fifth in terms of the number of millionaire households in the world, after the USA, Japan, the UK and Germany. With US$2.5 trillion in total household financial assets (excluding real estate and industrial assets), China is the second-largest private banking market after Japan (Yeung, 2009a).
European Urban and Regional Studies 18(1) These headline figures must, however, be treated with caution: 310,000 households account for just 0.07 percent of the Chinese population (assuming three persons per household). This figure pales in comparison with the 207 million (15.9 percent of the population) below the World Bank poverty line (US$1.25 per day in 2005 PPPs) in 2005 (Chen and Ravallion, 2008). Although the poverty count has declined dramatically, inequality has increased: the Gini coefficient rose from 0.288 in 1981 to 0.458 in 2000, dropping to 0.415 more recently (Jomo, 2006; UNDP, 2009). Chinese inequality has a strong ruralurban dimension. In 2007, rural households still accounted for 55 percent of the population and 60 percent of Chinas labour force. In the same year there were 41.7 million rural dwellers amongst 64.0 million people beneath the official poverty line and in receipt of the minimum living allowance (NBS, 2008). The capacity of these people to spend other than on essential goods is very small. Of income received, a high proportion is saved largely because of the lack of social safety nets. Household consumption as a proportion of GDP decreased from around 50 percent in the late 1970s to reach an all-time low of 35 percent in 2007, compared with some 70 percent in the USA (Figure 9; NBS, 2008). The potential domestic market is large, but per capita consumption power is at present relatively small.
Conclusions
In recent years, the relatively fast growth of China and a number of other large emerging economies and the relatively slower growth of Europe and the European-settled world have made a significant contribution to global convergence even though some parts of the world still lag in their development. In the years to come these trends are likely to continue. In the economically advanced parts of the world, relatively slow (and, it is hoped, ecologically sustainable) growth is almost certain. What matters is the composition and social usefulness of growth on the one hand and the distribution of income and wealth on the other (Storper, 2011). As for development models, one possibility is what Boyer (2004) has called an anthropogenetic development model
Dunford and Yeung in which health, education and culture are direct drivers of demographic development and lifestyles. In ageing societies, this type of model could be complemented by a new set of coreperiphery complementarities involving capital transfers rather than labour mobility and technology diffusion, as a result of which accumulated wealth in advanced countries acquires a permanent income from the rest of the world owing to collective investment in overseas real assets that make a decisive contribution to improved living standards in emerging economies. China, conversely, has the potential for several decades of sustained economic growth. In the case of China, greater global convergence is possible provided it can deal with the rising ruralurban and eastwest divides (Dunford and Li, 2010) and can overcome the constraints on ecologically sustainable, inward-oriented growth, mainly by effectively integrating the rural half of the population into an expanding domestic market and by addressing the environmental question. The recent stimulus programme is an effective instrument for reducing the immediate impact of the financial crisis and the global recession. However, in itself it is not a viable alternative model of development. As in the case of the existing mode of economic growth, the model promoted by the fiscal stimulus is still also largely driven by gross capital formation, and China may well encounter a number of pitfalls on the path to catch up with economically developed countries in Europe and the European-settled world. The analysis presented in this paper is, finally, quite different from the simpler argument outlined in the 2009 World Development Report: Reshaping Economic Geography (World Bank, 2009c). In this report, concentration (unbalanced development) is seen as inevitable and desirable but consistent with convergence (balanced development) if markets are integrated. The report identifies three trends (agglomeration and increasing density through urbanization, reductions in distance and disparities, and persisting divisions owing to the fragmentation of markets), three drivers of development (scale economies, migration and factor mobility, and trade costs) and three policy areas (urbanization, territorial development and regional integration to enhance specialization).
43 In addition to reflecting long-term ecological issues, the analysis of western and Chinese experience clearly shows that economic growth and development reflect trends in profitability and cyclical movements in economic life not considered in the World Development Report or the economic models that underpin it. Also pertinent are a series of other drivers, including the structural composition and the geographical profile of economic growth (financialization, de-industrialization and the offshoring of manufacturing), the structure of demand (infrastructural investment-driven, export-oriented and creditdriven consumer demand), national and international systems of regulation (financial liberalization, rules governing the mobility of capital and developmental state projects) and the specific geographical, social and institutional foundations of economic development. Modes of regulation and institutional mediations are, moreover, not just drivers of development but also the result of the imbalances and structural contradictions generated by economies subject to the reified economic categories of the models underlying the World Development Report. The argument of this paper accepts the value of these ideas but sees them as far from adequate for an understanding of the specificities of actually existing empirical economic geographies of development. Acknowledgements
An earlier version of this paper was presented at the 2009 Annual Conference of the Royal Geographical Society with the Institute of British Geographers in Manchester, UK, 2628 August 2009. We are grateful for the valuable comments made by a referee and the editors of European Urban and Regional Studies. This research was supported by an ESRC grant (RES-062-23-1600) and by an NUS FRCTier 1 Grant (R-109-000-084-112) for a project entitled Economic Inter-dependence and Comparative Regional Dynamics in Developed and Developing Economies: Trade and Regional Trajectories in China and the EU, and by a Chinese Academy of Sciences Visiting Professorship for Senior International Scientists Grant 2009S1-44.
Note
1. The BRIC countries are Brazil, Russia, India and China.
44 References
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Towards Global Convergence - Emerging Economies, The Rise of China and Western Sunset

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European Urban and Regional Studies

Chinese Academy of Sciences, China, and University of Sussex, UK

National University of Singapore

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Comparative global development

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European Urban and Regional Studies 18(1)

GDP per capita in 2008 in 1990 GK$

Africa 0 0 1000 2000 3000 4000 5000 6000 7000

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European Urban and Regional Studies 18(1)

Source: Elaborated from data from IMF (2008).

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European Urban and Regional Studies 18(1)

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Dunford and Yeung

Household debt as a share of disposable income (%)

United States United Kingdom Euro zone

Figure 4. Household debt as a share of household disposable income

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Assets as a share of GDP in 2006

Eastern Middle East Europe and North and Russia Africa

Figure 5. The depth of financial markets: Assets as a share of GDP in 2006

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UK Germany US Russia and USSR Rest of Europe and its offshoots

Figure 6. A second industrial divide

Source: Elaborated from data in Bairoch (1997).

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Western hemisphere Sub-Saharan Africa

Current account balance (US$ million)

Australia and New Zealand

Figure 7. Current account balance, 19982008

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The rise of China

United States (1840)

United Kingdom (1780)

Years since take-off

Figure 8. Economic growth trajectories since take-off

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Figure 9. Composition of Chinas GDP, 19782007

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Physical infrastructure and the volatility of capital flows

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European Urban and Regional Studies 18(1)

Overall financing RMB billion Percent 37.50

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R&D capacity and energy efficiency

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Healthcare, education, housing and social safety nets

Capacity of the consumer economy

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European Urban and Regional Studies 18(1)