China’s rapid economic growth means population is ‘wealthier but unhappier’

23 March 2012

The average personal income in China has risen by five per cent a year since the mid 1990s. Yet according to Professor John Knight and Dr Sai Ding in their new book, this recent wealth does not equate with personal happiness. In China’s Remarkable Economic Growth, they find that the happiness of the Chinese people has not risen as expected. When people were asked to rate their happiness or satisfaction with life, the average happiness score was found to have fallen over time.

The book is a culmination of a major research project funded by the Leverhulme Trust to explore China’s economic success, using macroeconomic data from the start of economic reform in 1978 and national household surveys undertaken by the Chinese Household Income Project. No other major country has grown so fast – by some ten per cent a year – for no less than three decades. The Oxford University researchers adopt a broad, systemic approach to explain why China is such an international outlier. The authors also explore the consequences of this remarkable economic phenomenon and social transformation for the Chinese people.

John Knight explained: ‘The unhappiest group in Chinese society are the rural-born workers who have migrated to the cities and towns. People still living in rural areas are found to have the highest happiness scores.  Despite their much higher incomes, urban-born people are less happy than rural people. We attribute this  to the loss of their “iron rice bowls” – the security that  the state-owned enterprises had provided before they were reformed or privatised - and their aspirations to “keep up with the Zhous” in the new market economy. The rural-urban migrants - there are now 150 million of them - have commonly raised their incomes by migrating but their aspirations have risen even faster as they become part of urban society.’

John Knight and Sai Ding argue that the policies pursued by the Chinese Communist Party since the late 1970s qualify China as a ‘developmental state’, in which the overriding policy priority is economic growth. China became a developmental state when the leadership under Deng Xiaoping introduced economic reform in order to restore and maintain political legitimacy. The drive to create a market economy succeeded because one reform led to another in a cumulative process. New institutions provided the right incentive structures, a prime example being that appointments at many levels rewarded success in promoting economic growth. A policy of fiscal decentralisation gave growth incentives to all tiers of government. Entrepreneurs gained confidence from these policies, leading to what the authors say was, by international standards, a ‘remarkably high’ level of both investment and saving.

They describe this combination of factors as a ‘virtuous circle’ of high confidence, high investment, high growth, and so on. However, it is argued that this growth has created a set of new and different problems, which threaten the virtuous circle.  Income inequality – initially too low to provide the incentives needed in a market economy – has risen to become the highest in Asia. China’s environmental problems have escalated, and corruption is a source of concern for the leadership. China’s system of governance provides little voice for its people and little political accountability, say the authors. They also warn that the virtuous circle could be broken by an adverse shock, such as a financial crash (associated with China’s macroeconomic imbalances) or social unrest. Because of these rising tensions the Chinese government has recently introduced policies to promote a ‘Harmonious Society’.

The book cites other reasons why the growth rate is likely to slow down somewhat in the future. There is less scope for the rapid structural change that has fuelled growth up to now. The one-child family policy of the reform period means that the labour force is beginning to decline, and the hitherto abundant supply of migrants from  the countryside is drying up. This will require a change in development strategy away from the currently successful one of producing labour intensive exports.

Sai Ding commented: ‘Can other developing countries learn from China’s growth success? The Chinese economy is too different to permit simple copying. The most important lesson that it offers other countries lies in the answer they can find to the question: Can they create a developmental state while avoiding the disadvantages that have accompanied it in the Chinese case?’

The book China’s Remarkable Economic Growth is published by OUP on 12 April 2012 at £25 in hardback.  Advance copies are available from kate.farquhar-thomson@oup.com or 01865 353423

For interviews with Professor John Knight, contact the University of Oxford Press Office on 01865 280534 or press.office@admin.ox.ac.uk

Notes for Editors

John Knight is Emeritus Professor of Economics and Fellow of St Edmund Hall, University of Oxford.  He has conducted research on the Chinese economy for more than two decades, and has published many journal articles, including papers on income distribution, poverty, wages, migration, education, subjective well-being, and economic growth. His books on China include The Rural-Urban Divide: Economic Disparities and Interactions in China and Towards a Labour Market in China.  The latter book received the Richard A. Lester Prize, awarded at Princeton University, for "the outstanding book in Labor Economics and Industrial Relations published in 2005." He is a long-serving editor of the Oxford Bulletin of Economics and Statistics.

Sai Ding is Lecturer in Economics at the Business School, University of Glasgow.  She graduated from Nankai University and obtained her doctorate at Birmingham University before becoming a Research Fellow in Oxford, where she collaborated with John Knight on the research for this book. Her current research is on corporate investment and finance in China.