The collapse of the middle class and social divisions, By Uddin Ifeanyi

Three years ago, China’s nominal gross domestic product (GDP) stood at two-thirds that of the United States of America. When you consider that in 2021, China’s GDP (in constant 2015 US$) was $17.82 trillion having risen from the $59.72 billion it stood at in 1960, this is a considerable achievement all on its own. However, against the fact that just before the COVID-19 pandemic, China’s nominal GDP was about 75 per cent of the US’, the story surrounding the Chinese economy’s recent dismal performance is worth examining in much more detail. At its most basic, the “China will catch up with and overtake America before mid-century” narrative, popular a few years ago, is now a 21st-century myth.

What happened? Go back four decades and a half to 1978. That year, guided by Comrade Deng Xiaoping (he was known then as the “General Architect”, having previously been denounced as a “capitalist roader” under Chairman Mao Zedong) the Chinese Communist Party implemented a mixed bag of market reforms under the rubric “socialist market economy”. Agriculture was removed from the stifling hand of collective organisation, foreign direct investment was welcomed into the country, and state-owned enterprises were privatised in the first phase of what was to be characterised later as “socialism with Chinese characteristics.” By 1985 – the beginning of the second phase of the reforms – price controls were lifted.

And so, whereas in the 26 years to 1978, the Chinese economy grew by a little over 6 per cent each year, between 1979 and 2012, the economy averaged GDP growth of over 9 per cent annually. So, what changed? Consider the evolution of the notion of “common prosperity”. Up until 1978, the Chinese Communist Party understood this phrase to mean the joint ownership by the people of all property. After all, Pierre-Joseph Proudhon had taught that “property is theft”. And who better to guard against expropriation and illicit appropriation at the national level, than the people themselves? Within this context, an essential part of the genius of Comrade Deng Xiaoping’s reforms was to repurpose this phrase: and from 1979, “common prosperity” in China came to include the idea that some Chinese could prosper before others.

Beginning from 2013, however, the Chinese Communist Party was increasingly spooked by how wealthy some Chinese were becoming. Thus, whereas China lifted approximately six hundred million people out of poverty following Deng Xiaoping’s market-based reforms in 1978, the emergence of Comrade Xi Jinping a little over ten years ago heralded the techlash that defined “common prosperity” as involving a more equitable distribution of income. Most commentators date China’s engagement of the economy’s reverse gear to November 2020, when the authorities suspended Ant Group’s initial public offering. Nonetheless, Jack Ma’s disappearance from the public space was one of the more dramatic episodes of this new phase, as was the spectacular erosion of the threat posed by companies like Alibaba to global business chemistry and physics.

Besides the technology sector (represented by companies such as the Alibaba Group, Didi, Baidu, and Tencent), which suffered swingeing fines, the property and tutoring sectors saw crackdowns and renewed regulations. Some of whose outcomes still weigh heavily, today, on the economy’s medium-term outlook.

It is easy to conclude that in the face of the American economy’s resilience, the Middle Kingdom’s GDP has slipped dramatically. But despite the US’ seeming success, one could agree with Comrade Xi (in his 2021 address to the Central Financial and Economic Affairs Commission) that in the world’s leading economy, “the wealth gap and middle-class collapse have aggravated social divisions, political, polarisation, and populism”.

If, however, there is a profound lesson to the world from the conflicting recent fortunes of the world’s two leading economies, it surely cannot be the suppression of an economy’s “animal spirits” in the interest of its social health by the authorities – no matter how well-meaning. This is not just because the authorities rarely are able over any decent period of time to allocate resources as well as the markets – as China’s example is making the clear. Nor have governments been able to agree governance models for the management of society’s changing needs before these needs themselves become obsolete. Desirable though the need to balance society’s need for social balance against the extremes of wealth and poverty that technological change and the market forces bring about, the unpredictability of a free society’s next point of inflection makes this effort a mug’s game.

Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.