Beijing’s GDP Numerology

There are few constants during a time of economic uncertainty. But for those seeking solace in the midst of economic torment, look to the ongoing meetings of the National Peoples Congress in Beijing. Last week, Premier Wen Jiabao launched the sessions by delivering Chinas version of the State of the Union address. Although the world, rattled by the global financial crisis today, looks vastly different than it did a year ago, he repeated with all the certainty of a pastor pronouncing amen that in 2009, yet again, Beijing would be setting a target of 8 percent annual GDP growth.

In recent years, this official target has drastically underestimated Chinas actual growth. This time, many observers think it may be an overestimate. In both cases, the question remains: Why is 8 percent considered the magic number? (Surely it isnt just because in Mandarin, eight is a near homonym for prosperous and considered a lucky number.)

Most China watchers will tell you, as though it were a certain fact, that approximately 8 percent growth is the level needed to keep employment up — and the potential for social unrest down. It is typically assumed that 8 percent is what is required to create enough jobs to absorb laid-off workers from failing state-owned enterprises (SOEs) and new graduates entering the labor pool. Senior leaders in China, from the president down to the lowliest county magistrate, pay homage to the importance of achieving 8 percent growth. No one claims to want much more (well, a little more cant hurt much), or much less. Too much more than 8, and you risk runaway inflation; much less than 8, and unemployed workers will march in the streets and chaos will ensue. But when and how did 8 percent become sacrosanct?

In all questions of faith, look first to ones creator. In this case, that means Deng Xiaoping. At the 12th Party Congress in September 1982, Deng determined that the national economic goal would be to quadruple the annual industrial and agricultural output of the entire country by the end of the century. Prior to the big meeting, Deng asked then General Secretary Hu Yaobang how the country could quadruple its economy from 710 billion yuan in 1980 to 2,800 billion yuan in 2000, and Hu responded that 8 percent annual growth would do the trick. Thats it. Theres no complicated secret formula, no hallowed equation precisely linking growth to employment, no connection to the revered words of Confucius, Mencius, or Lao-tzu. Back in 1982, it was determined that it would take 8 percent annual growth to quadruple the economy by 2000.

The end of the century has come and gone, but the target has remained the same. Subsequent five-year plans have all set an annual growth target between 7.5 and 8.5 percent. This national objective has since become the obsession of officials at each level of the governments vast bureaucracy.

The truth is, its hard to tell exactly what Chinas annual growth rate actually is. Because officials receive promotions based on how well they tend their economic gardens, theres a strong incentive for mandarins at all levels to fudge the numbers they report up the bureaucratic food chain. Each year, county officials are instructed to tally their economic growth figures and report them to the next level, which then reports to the provincial government, which reports to Beijing. Invariably, almost every province reports economic growth exceeding the national average — which, of course, is impossible. As Jim Mann, the noted author and former China correspondent, once pointed out: It is like Lake Wobegon. All the children are beautiful and above average.

This presents difficulties for senior leaders in Beijing, who have to somehow adjust for such bureaucratic inflation. At least by now they are well aware of the phenomena. In the late 1950s, local officials showed similar zeal (and political acumen) when they inflated grain outputs in their reports to higher authorities, resulting in mass starvation when the central government failed to recognize the trend of inflationary reporting, known as the winds of exaggeration. China is not a federal system. Although Beijing does occasionally dispatch secret investigators, the central government remains almost entirely dependent on provincial reporting chains. Regardless of this statistical ambiguity, one thing remains certain: the national fixation on growth.

Although theres nothing magic about the 8 percent target, economic growth has long been linked to employment and social stability. In 1993, former Premier Zhu Rongji was promoted from his job as head of the Shanghai political machine to manage the countrys economy. The Central Committee that year promulgated an economic guidance document, the Decision on Issues Concerning the Establishment of a Socialist Market Economic Structure, ultimately resulting in a policy that became known as, grasping the large, letting go of the small. Millions of workers in small, inefficient SOEs were let go or xia gang — meaning they were on permanent furlough without pay, but perhaps a token benefit package. Larger SOEs were reorganized, laying off millions more. Getting those workers back into the workforce was a top priority, lest they take to the streets with their idle time to complain about pensions that never materialized. Zhu was tasked with breaking the iron rice bowl and reforming the previously planned economy into a globally competitive one. However, finding jobs for the laid-off workers required massive capital investments in infrastructure and new, often foreign technology, resulting in rapid economic growth along with inflation rates of 10 to 15 percent per year in the first half of the decade. While Zhu accomplished his goal of growing the economy and averting social unrest, the rapid growth and volatility presented its own set of challenges.

Although Beijings obsession with employment is well known, its fear of inflation is an equally important motivator. Officials in China feel they must walk a fine line between creating jobs and keeping a lid on prices. Chinese historians point out that the Red Army alone did not defeat the Nationalists (KMT) in 1948 — hyperinflation, which resulted in skyrocketing food prices, was an equally essential factor in undermining the KMTs legitimacy. Later, the Communist Party saw its own authority tremble in 1988, when inflation reached 20 percent, resulting in panic-buying and contributing to discontent that culminated in the Tiananmen Square protests of 1989.

Today as Beijing grapples with a global financial crisis, it might all come down to pork — not wasteful government spending, but the other white meat. In China, gas prices are tightly controlled, and the government still manages grain prices. So food prices, and pork in particular, will play a significant role in Chinas economic recovery. China is the worlds largest producer and consumer of pork, which makes up 80 percent of meat consumed in the country, affecting almost every familys grocery budget.

Food contributes to at least a third of Chinas consumer price index (CPI) basket. As a measure of inflation, the CPI is closely watched as a barometer for potential unrest. Because lower income families have to devote a larger portion of their income to food, the government is particularly concerned about the impact of rising food prices on citizens that have not benefited from Chinas economic development — and who are potentially dissatisfied with the government. Recognizing this, the National Development and Reform Commission, Chinas economic planning ministry, placed price controls on a number of food staples and building materials last year, trying to rein in rising prices, including a pork price increase of almost 60 percent over the previous year.

When I see Premier Wen Jiabao on Chinese TV, I am often filled with sympathy for him. Taking on the massive challenge of creating up to 9 million jobs a year in the midst of global financial turmoil and the anxiety caused by falling exports, the premiers annual work report at the National Peoples Congress is reassuring in its predictability and sense of certainty. Its no secret that 8 percent GDP growth will be a difficult target to reach this year. However, the premier is seeking to reassure his troops, preaching a message that resonates with his flock and silently invoking the convictions of Deng Xiaoping that Chinas economic growth is an article of faith.