Why GDP growth targets are underrated

These are not good times for the credibility of China’s GDP growth targets. Just weeks after unveiling an ambitious target of 5.5% real GDP growth for 2022, the central government effectively ensured that target will not be met by requiring local governments to impose strict lockdowns to contain the spread of Covid-19. The restrictions cover most of China’s major cities, have had a clear negative impact on economic activity in March that will only worsen in April.

The government is now in a lose-lose situation: if it stimulates growth enough to actually meet the target, then it will overheat the economy (as it did in 2020); if it doesn’t, then its growth targets become less credible. The credibility was already not high after the 2021 target was set a 6.0%, a figure so disconnected from the reality of a cyclical bounce that delivered 8%-plus growth as to be almost meaningless in practical terms. If China’s government doesn’t even try to ensure that GDP growth is close to its target, then why bother having a target in the first place?

These kind of problems are among the reasons why well-meaning economists have for years been urging China’s government to give up GDP growth targets. They don’t seem to actually function well as a guide for macroeconomic policy. And the crude focus on increasing economic aggregates has been blamed for everything from worsening environmental pollution to driving the unsustainable accumulation of debt. The conventional wisdom about China’s GDP growth targets was well captured in this piece from 2014 by an old colleague at The Wall Street Journal:

The target is a relic of the Stalinist planned economy, the basis on which the government planned the allocation of scarce resources for industrial production. Its continued existence is testament to how far China has to go to fully embrace a market economy, one that operates according to market signals.

While this is an understandable view, I believe the events of recent years have strengthened rather weakened the case for GDP growth targets. Given China’s actually existing political economy, GDP targets are, if not exactly optimal, then certainly a reasonable second-best policy framework. And so far their track record is better than the alternative.

The belief of most economists, both Chinese and Western, that I have interacted with over the last couple of decades is that China would be better off moving away from GDP growth targets, as doing so would improve economic management and lead to more rational policymaking. So when Xi Jinping opened his second term in 2017 by announcing that the government would in future focus less on the quantity of GDP growth and and more on its quality, there was a general feeling that this was a natural, inevitable and generally positive evolution.

I did not have such a good feeling about this shift. Back in 2017 I wrote a piece for my employer arguing that if growth targets were de-emphasized, “then what’s left will be a confusing welter of political, social and environmental mandates.” Rather than being a victory for rationality and reform, the de-emphasis on growth targets was actually a signal that economic decision-making would become more politicized:

Xi now wants to orient the government around delivering a “better life” for people rather than economic growth alone. But determining what exactly a “better life” consists of is a top-down process managed by the Communist Party leadership, rather than a bottom-up process driven by local exploration. It is very unlikely to mean a more hands-off attitude towards economic management: Xi’s administration has shown a decreasing tolerance for volatility in economic growth and market prices. Since he doesn’t trust local governments to do the right thing, Xi actually wants to have more centralized direction of the economy in the future, not less.

I think it’s fair to say this prediction has been completely vindicated, particularly by the “regulatory storm” of 2021 with its multitude of highly interventionist policies aiming to reshape entire industries. Limiting the power of large private companies was even a fairly explicit goal: it’s probably not a coincidence that the main targets of last year’s political-regulatory campaigns were real estate and the internet, the two economic sectors that have created the biggest private-sector fortunes. All of this was certainly enabled by Xi’s dictum that there are more important things than GDP growth. The costs and economic downsides of the regulatory storm were put aside in favor of other goals.

What should now be clear is that GDP growth targets were not actually the main cause of excessive or ill-considered government intervention in the economy. That tendency comes from something much more fundamental: China’s Leninist political system, which is organized around mobilizing officials to direct social transformation. As Ken Jowitt put it: “The definitional tendency of Leninist regimes [is] their attempts to control and specify the substantive dimensions of social developments, not merely the framework within which such developments occur.”

De-emphasizing GDP growth targets would have done what liberal reformers hoped for if had been accompanied by fundamental political changes in the mission of the government. That is, if the government had accepted a role as a more neutral regulator and provider of public goods, and been content to provide a framework in which private actors could pursue their own goals.

Instead, what happened is that Xi Jinping carried out a grand project to reorient the Communist Party’s mobilizational machinery away from the pursuit of economic growth and toward a broader set of goals, which can be summarized as the pursuit of “national greatness.” These include things like technological independence, greater income equality, and a better natural environment. Xi’s idea that there is more to life than economic growth seems to be long-held and sincere: he articulated it back in 2001 when he was a mere provincial governor. But the shift to goals defined more by political and social values rather than quantitative measurements has led to economic management occurring through politicized campaigns.

The trick about GDP targets is that they are compatible with both the Leninist focus on achieving society-wide goals, and the liberal preference for allowing individual agents to pursue their own goals. Growth is a collective accomplishment for which the government can take credit, but the exact means by which growth is achieved can be left up to individual actors.

The focus on growth thus functioned to smuggle some liberalism into China’s Leninist political system. When Deng Xiaoping formally shifted the Party’s goal from class struggle to economic development back in 1978, he opened up much more space for individual choice and decentralized action in China than had previously existed. Entrepreneurs and local governments could pursue their goals without having to check them for ideological consistency.

As Joseph Fewsmith has argued, this process eroded the effectiveness of the Leninist political machinery, something that Xi has worked hard to fix. The de-emphasis on GDP growth, rather than being a technocratic or pro-market reform, is fully consistent with Xi’s renewed focus on ideology and political discipline.

But Xi also knows that continued GDP growth is necessary for his project of achieving national greatness to succeed, so he can’t completely ignore economic realities while pursuing his transformational political campaigns. By the end of 2021, the economy had slowed sharply enough that it was becoming obvious that a change of course was necessary. In December, when when Xi chaired the annual Central Economic Work Conference, the signal was clear: the priority is now the “stability” of the economy.

Since then, various political slogans and campaigns have been much less in evidence and the focus has been on more practical short-term measures. Senior officials have even promised not to introduce policies that “adversely affect market expectations”–effectively admitting that they had been doing just that in the recent past. Veteran economist Li Yang, in a commentary in January, seemed to breathe a sigh of relief at the change in policy tone:

At the beginning of reform and opening up, our Party clearly proposed to change its focus from “class struggle” to “economic construction.” This shift was a milestone: it brought us forty years of rapid growth that made China’s economy the second largest in the world and made China a country that the world does not dare to underestimate. However, this phrase has been said less often in recent years, and this meeting reiterated it, which is quite significant.

Such cautious optimism that the pendulum was swinging back to the “good old days” of more growth and fewer political campaigns has probably not survived the drastic Shanghai lockdown, which is widely perceived as being driven by a political imperative to demonstrate victory over the virus rather than pure public-health considerations. Covid policy is being personally directed by Xi, who used a Politburo meeting in March to require “perseverance” in the strict approach. The Party’s propaganda system also continues to churn out material supporting Xi’s long-term shift of aspirations away from simple economic development toward the more values-based “better life” framework.

In this context, the more that China’s government talks about how to keep economic growth humming, the better for business and investor confidence. A policy framework that focuses on steady growth in national income over time is certainly better than a policy framework that lurches from campaign to campaign. The debate over whether the government can achieve this year’s GDP target is a sideshow: it probably can’t, and it won’t cause a crisis of confidence to admit that. What’s really important is whether or not the government is re-committing to a growth-based policy framework.

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