Strategic Asia 2005-06: Military Modernization in an Era of Uncertainty

China’s Economic Growth: Implications for the Defense Budget

Executive Summary This chapter examines whether China will be able to sustain high rates of economic growth over the coming decades and draws implications for the Chinese defense budget. main argument: • Numerous weaknesses in the Chinese economy include a banking system with non-performing loans, serious environmental challenges, and the need to accommodate 300–500 million rural-to-urban migrants over the next two decades. • Barring war in the Taiwan Strait, however, high rates of economic growth are likely to continue in China for at least the next decade. Both China’s high rate of investment and the rapid expansion in the education level of its workforce are likely to continue. The large pool of underemployed rural labor can also be shifted to higher productivity urban jobs. • During the first half of the reform period, military expenditures did not seem to increase at all in real terms. Since 1996, however, defense expenditures have been rising more rapidly than the growth rate of GDP. policy implications: • Sustained high rates of growth help China to remain politically stable, which is in the best interests of the U.S. • By contrast, protectionist trade measures directed at China will make little real difference to unemployment levels in the U.S. or the size of the U.S. current account deficit, but could hurt Chinese growth and certainly increase tension between the two nations. • China’s defense expenditure will continue to rise. The U.S. is not in a position to stop this growth, but there is likewise little reason for the U.S. (or the European Union) to try to facilitate this growth, either through direct sales of advanced weaponry or by cooperation in research that has clear military applications. China’s Economy Dwight Perkins is the H.H. Burbank Professor of Political Economy at Harvard University and was Director of the University’s Asia Center from 2002 to 2005. He can be reached at . China’s Economic Growth: Implications for the Defense Budget Dwight Perkins China’s rapid economic growth and the need to sustain this high growth rate well into the future have, for the past two decades, driven Chinese policy decisions not only in the economic sphere but also in the political and foreign policy arenas. Economic considerations are likely to be equally central in both China’s domestic and foreign policies for the coming decade. Though most policy choices are shaped by economic considerations, the need to sustain high levels of growth will not override what Chinese leaders feel to be fundamental challenges either to Chinese sovereignty (e.g., if Taiwan were to declare independence) or to the rule of the Chinese Communist Party (CCP). Sustained, rapid economic growth is desirable not only because it will raise the standard of living of the Chinese people, but also because it is essential if the government is to maintain political stability. The CCP bases its continued legitimacy on the fact that Party rule has brought unprecedented prosperity to a large portion of the Chinese people, particularly those in urban areas. Communist ideology, by contrast, plays very little role in maintaining popular support for the CCP-led government or in providing the cement that holds the Party itself together. Rapid economic growth over the past quarter century has also fueled feelings of nationalism brought on by pride in China’s rising strength on the international stage. It thus does not take much imagination to see how a failure to sustain high economic growth rates could lead to both domestic and international crises. The demands of economic efficiency have already led to large-scale 36 • Strategic Asia 2005–06 unemployment (particularly in northeastern China), and slower growth would both produce fewer jobs for urban residents and slow or halt increases in their still overall low standard of living. More importantly, a vast store of underemployed labor remains in the countryside; this massive workforce could move to the cities without any significant decline in farm output. If, over the next two decades, China follows the pattern laid down by neighboring countries such as Japan and South Korea, roughly 300–500 million workers and their families will migrate to urban areas and take up non-agricultural employment. If the economy is not able to supply the additional jobs required by this massive infusion of labor, these migrants will either remain underemployed in large urban slums or languish in the countryside and resent the better...