BERGGRUEN INSTITUTE China / SUPPLEMENTAL COUNTRY

BERGGRUEN GOVERNANCE INDEX

China / SUPPLEMENTAL COUNTRY CASE STUDY 2019

BERGGRUEN INSTITUTE

UCLA Luskin School of Public Affairs & Hertie School of Governance 2019 GOVERNANCE INDEX TEAM

Principal Investigator Helmut K. Anheier

Project Supervisor, Berggruen Institute Dawn Nakagawa

Research Scientist Markus Lang, Heidelberg University

Data Updates CJ Yetman, Hertie School of Governance

Editorial Regina A. List, Hertie School of Governance

TEAM MEMBERS WHO CONTRIBUTED TO THE DEVELOPMENT OF THE INDEX

Project Founders and Creators Nicolas Berggruen and Nathan Gardels

Research Scientists Matthias Haber, Liam F. McGrath, and Piero Stanig

Research Associates Edward L. Knudsen, Olga Kononykhina, and CJ Yetman

Manager Regina A. List

Additional Assistance Sonja Kaufmann, Jessica Leong Cohen, Diego Fernández, Christopher Ellis CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 3

China / SUPPLEMENTAL COUNTRY CASE STUDY 2019

This profile on China is a supplement to the 2019 Berggruen Governance Index which analyzes the quality of Democracy, Government and Life for 38 countries. In 2019, five countries from the 38 were selected to have special profiles created about them to supplement and enhance the findings in the Index. These countries were selected because they performed better (Overachiever) or worse (Underachiever) than expected on the Quality of Life given their scores on one of the other indices (Quality of Democracy or Quality of Government). To create the supplement, new data was sourced from outside the Governance Index, to further explain these results. This profile is not intended as a stand alone document and is best understood after reviewing the full report which can be found at www.berggruen.org. 4 | BERGGRUEN GOVERNANCE INDEX

China, the world´s most populous country, and with GDP growth well above global averages, hovers at the bottom of the Berggruen Index ranking in 31st in Quality of Democracy (31st) faring just slightly better in Quality of Government (27th). Still, it manages to maintain a fairly high Quality of Life (15th). This discrepancy between Q of D, Q of G and Q of L seems attributable to China’s rapid economic growth since 2004, fueled by direct foreign investments and massive investment in infrastructure. But there are concerns about China’s increasing debt levels to maintain growth rates, questions about the sustainability of costly infrastructure investments domestically as well as international through the Belt and Road Initiative.

China has made it clear it is not concerned with improving democracy, yet even with its low score in Q of G, it has taken steps to try and improve government efﬁciency, governance and to reduce corruption. But the country still ﬂounders in Q of G and Q of D. With rising wealth gaps and lack of feedback mechanisms, China may see a slowdown in both its trajectory of growth and Quality of Life.

FINDINGS IMPLICATIONS

China has been an outlier in its Sustained GDP growth and investments in ability to achieve and sustain Q infrastructure and education have delivered higher 1 of L (15th) with low Q of G (27th) Q of L than China’s ranking for Q of D or Q of G and low Q of D (31st). would indicate.

China’s ability to match funds to citizen-desired China’s infrastructure building projects would improve with better quality of programs have produced high feedback mechanisms. Declining ridership 2 Rail & Road satisfaction, but indicates a mismatch between investments and ridership is declining. the needs of citizens. Better quality of feedback mechanisms could improve this.

China weathered the Global With high debt to GDP and concerns it is risking Financial Crisis and stimulated its “debt addiction”, China needs to develop a economy by using debt-funded sustainable domestic growth model to maintain 3 investments to propel rapid long- its rapid ascent. term economic growth. CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 5

BACKGROUND

GDP per capita (current US$) 2004-2018 GDP per capita is gross domestic product divided by midyear population.

10.000$

7.500$

5.000$ GDP per Capita (in $)

2.500$

2004 2008 2012 2016

Source: World Bankorld Bank 2019 2019

• China is a middle-income country. Its 1.4 billion inhabitants • GDP per capita growth has averaged 6.75% over the past have a GDP per capita of $9771, placing it 64th worldwide four years (2015-2018), well above regional and world and 20th among all countries in the Berggruen Index, averages. China’s impressive economic expansion has according to the World Bank (2018). accounted for over nearly one third of global growth over this time period.

Total Population, 2004-2018 Total population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship.

1.40B

1.35B

1.30B Population (in Millions) Population

1.25B

2004 2008 2012 2016

Source: Worldorld Bank Bank 2019

• China is the most populous country in the world. Along • Its population growth rate of .52% was slightly lower than with India, China is one of two countries with a population other the average for East Asian countries. of over a billion people. 6 | BERGGRUEN GOVERNANCE INDEX

• China has invested substantially in infrastructure over the past Trailing the UK were the United States, India, France, and fifteen years. This is particularly evident in rail investment, Germany, with 11, 10, 9, and 6 billion EUR, respectively. which has surpassed 100 billion EUR in recent years. The rate • Despite this substantial investment, rail ridership has of investment increased substantially after the 2008 Global actually declined since 2008. Ridership in 2017 measured Financial Crisis (GFC), which prompted China to spend on in rail-passenger-kilometers was slightly less than 700,000, large projects in order to stimulate its economy. roughly the same level as a decade prior. • By contrast, the next closest country in rail investment, the United Kingdom, invested less than 15 billion EUR in 2017.

Rail Investments, 2004-2017 Rail investment covers spending on new transport construction and the improvement of the existing network.

120B

80B

40B Rail Investments (in Billion Euro) Rail

2004 2008 2012 2016

Source: ITF Transport Statistics: Transport infrastructureransport infrastructure investment investment and and maintenance maintenance 2019

Railway Passengers, 2004-2017 Passengers carried by railway are the number of passengers transported by rail times kilometers traveled.

900.000

800.000

700.000

600.000 Railway Passengers (Million Passenger-Km) Passengers Railway

500.000

2004 2008 2012 2016

Source: International Union of Railwaysailways (UIC) (UIC) 2019 CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 7

• Related to this rail investment is an overall surge in debt, • Chinese debt, however, is relatively unique. It is concentrated particularly following 2008. After the GFC, China enacted the in non-financial corporations, which is unusual by perhaps largest Keynesian stimulus in world history, spending international standards. Although household and central lavishly on debt-financed projects to boost the economy. government debt has increased since 2008, it is not the main driver in the credit expansion. • In 2017, China’s total credit to the non-financial sector exceeded 250% of GDP. Early in the 21st Century, this figure had been • The distinct nature of Chinese debt is a result of the declining, but following the 2007-08 financial crisis it jumped governance structure of its economy, particularly the dramatically, and has increased at a large rate ever since. prevalence of state-owned enterprises (SOE). Following the financial crisis, several state-owned banks were instructed • Credit/GDP surpassed famously debt-saddled Japan in 2009. to provide stimulus to the economy, particularly through It has long had more credit as a share of GDP than Germany, infrastructure projects. Thus, while debt may not show up on which is known for debt-aversion. the balance sheet of the central government, the vast majority of it is the direct result of state action and direction.

Total Credit to Non-Financial Sector, 2014-2017 Credit is provided by domestic banks, all other sectors of the economy and non-residents. The ‘private non-financial sector’ includes non-financial corporations (both private-owned and public-owned), households and non-profit institutions serving households as defined in the System of National Accounts 2008.

300%

China 250%

200%

Japan

150%

100% Germany Percentage of GDP Percentage

50%

2005 2010 2015 Source: BIS 2019

Source: BIS 2019

300%

250%

200%

150%

100% Percentage of GDP Percentage

50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

General Government Households and NPISHs Non-Financial Corporations Source: BIS 2019

Source: BIS 2019 8 | BERGGRUEN GOVERNANCE INDEX

CHINA’S BERGGRUEN INDICATOR OF GOVERNANCE SCORES

• China’s score in the Berggruen Quality of Democracy • China’s case is a remarkable example of one indicator Index (QoD) was near the bottom of the countries ranking far above the other two. For most countries, examined, placing 31st of 38 countries (data collected there is a strong co-movement of the indices, but China’s 2004-2018). QoL far outstrips its results on the other two indicators.

• China’s score in the Berggruen Quality of Government • It’s QoL ranking is also relatively high compared to its Index (QoG) is slightly higher, ranking 27th. GDP/capita ranking of 20th among all countries in the Berggruen Index. This shows that, despite China’s low • China’s ranking in the Berggruen Quality of Life QoG and QoD, it manages to punch above its weight Index (QoL) is dramatically higher than its QoD and QoL with regard to converting wealth to quality of life. rankings. It places 15th.

Quality of Democracy Quality of Government Quality of Life

Sweden Sweden Sweden Norway Norway Netherlands Switzerland Netherlands Norway Germany Switzerland Germany Netherlands Germany Switzerland Canada United Kingdom Japan Australia Canada South Korea United Kingdom Australia Australia France South Korea Canada United States Japan United Kingdom Italy United States France Spain France United States Israel Israel Israel South Korea Spain Spain Japan Chile China Chile Italy Italy Argentina Georgia Saudi Arabia India Jordan Vietnam South Africa Saudi Arabia Georgia Brazil South Africa Chile Indonesia Ghana Jordan Pakistan Argentina Kazakhstan Mexico Brazil Russia Ghana Colombia Turkey Philippines Vietnam Ghana Kenya Turkey Philippines Georgia China Argentina Colombia Mexico South Africa Ukraine Kazakhstan Ukraine Russia India India China Russia Egypt Saudi Arabia Philippines Mexico Nigeria Egypt Indonesia Kazakhstan Ukraine Kenya Turkey Kenya Colombia Jordan Indonesia Brazil Vietnam Nigeria Pakistan Egypt Pakistan Nigeria 0 25 50 75 0 25 50 75 0 25 50 75

2018

QUALITY OF DEMOCRACY (QoD)

• China’s 2018 Quality of Democracy score is slightly higher • China has hovered near the bottom of the QoD rankings than it was in 2004. However, this small overall shift belies throughout the last fifteen years. Unlike many countries, several ups and downs over that time period. in China there is little pretense about a desire to improve • Despite the label of a ‘socialist democracy’ that many democracy. The CCP has taken well-documented Chinese leaders use, few scholars regard China as a measures to improve its control over Chinese society. democracy in any traditional sense. Although there are President Xi Jinping – who remarked on a 2014 trip to some elections at the village level, the candidates are Europe that multi-party democracy ‘would not fit us’ – has carefully vetted by the Chinese Communist Party (CCP). strengthened his hold on power. CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 9

Berggruen Quality of Democracy Index, 2004-2018

100

25 Quality of Democracy (0-100)

2004 2008 2012 2016

Lines indicate 95% credible intervals for the average score, a measure, a measure of uncertainty. of uncertainty.

QUALITY OF GOVERNMENT (QoG)

• Quality of Government in China has improved slightly since • While these efforts may be partially responsible for China’s 2004, with a mostly steady upward trend. improvement, they have not been successful in boosting • Over this time period, China has been undergoing well- China’s QoG substantially. At 27th of 38, China’s quality of documented efforts to increase governmental efficiency, government still falls near the bottom of the data set. crack down on corruption, and improve on governance. This process has included devolving powers to local governments, increasing the amount of public services accessible online, and reducing regulation.

Berggruen Quality of Government Index, 2004-2018

100

25 Quality of Governance (0-100)

2004 2008 2012 2016

Lines indicate 95% credible intervals for the average score, a measure, a measure of uncertainty. of uncertainty. 10 | BERGGRUEN GOVERNANCE INDEX

QUALITY OF LIFE (QoL)

• Quality of Life has improved substantially since 2004. • Given China’s rapid economic growth over this time While there have been some years in which it declined, period (China’s GDP/capita was only $1508 in 2004; the overall trend is unmistakably upward. in 2018 it was $9771), this boost in QoL is not entirely surprising.

Berggruen Quality of Life Index, 2004-2018

100

Quality of Life (0-100) 25

2004 2008 2012 2016

Lines indicate 95% credible intervals for the average score, a measure, a measure of ofuncertainty. uncertainty.

WHAT RELATIONSHIPS BETWEEN QoD, QoG, AND QoL CAN BE OBSERVED?

EXAMPLE 1: RAIL/ROAD SATISFACTION

Satisfaction with Roads and Highways Sub-Index of Quality of Life

Switzerland Netherlands Sweden Germany South Korea France Spain Japan United Kingdom China Saudi Arabia Georgia Norway Chile Canada United States Australia Philippines Israel India Jordan Vietnam Mexico Turkey Kazakhstan Indonesia South Africa Argentina Nigeria Colombia Italy Egypt Russia Brazil Ukraine Pakistan Kenya Ghana 0 25 50 75 100 CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 11

Rail/Road Satisfaction and Politicized Bureaucracy

100 Switzerland Netherlands

Sweden South Korea France Germany

Japan Spain

75 United Kingdom China

Saudi Arabia Canada Georgia Norway United States Chile Philippines India Australia Israel 50 Vietnam Mexico Jordan

Kazakhstan Turkey Indonesia

South Africa Rail/Road Satisfaction (0-100) Rail/Road 25 Argentina Nigeria Egypt Colombia Russia Italy Pakistan Brazil

Ukraine Ghana

0 Kenya 0 25 50 75 100

oliticized Bureaucracy (0-100) Politicized Bureaucracy (0-100) x; Berggruen Quality of Life Index

Source: Berggruen Quality of Governance Index; Berggruen Quality of Life Index

Rail/Road Satisfaction and Recruitment

100 Switzerland Netherlands

France Sweden Germany South Korea Spain

Japan 75 China Saudi Arabia United Kingdom Georgia Norway Chile Canada Philippines United States Israel Australia 50 India

Turkey Indonesia Rail/Road Satisfaction (0-100) Rail/Road 25

Italy

Russia Brazil

0 Ghana 25 50 75 100

ecruitment (0-100) Recruitment (0-100) x; Berggruen Quality of Life Index

Source: Berggruen Quality of Governance Index; Berggruen Quality of Life Index 12 | BERGGRUEN GOVERNANCE INDEX

Rail/Road Satisfaction and Feedback Mechanisms

100 Switzerland Netherlands South Korea France

Germany Sweden Spain

Japan United Kingdom 75 China Saudi Arabia

Georgia Chile Canada Norway

Philippines Israel United States Jordan Australia 50 Vietnam India Mexico

Turkey Indonesia

Kazakhstan South Africa Rail/Road Satisfaction (0-100) Rail/Road 25 Colombia Argentina Egypt Nigeria Russia Italy Ukraine Brazil

Pakistan Ghana 0 Kenya 0 25 50 75 100

Feedback Mechanisms (0-100) Feedback Mechanisms (0-100) x; Berggruen Quality of Life Index

Source: Berggruen Quality of Governance Index; Berggruen Quality of Life Index

• China is very satisfied with the overall quality of its rail • Across the data set, there is a positive correlation between and highway system. Rail/road satisfaction (QoL) ranks rail/road satisfaction and politicization of bureaucracy (QoG). 10th among countries in the Berggruen Index, trailing China is somewhat of an outlier in this trend, placing near only much more developed countries. Notably, it easily the developed Western European countries in road/rail surpasses the United States, which places 16th. satisfaction, but scoring similarly to countries like Turkey and Russia in politicized bureaucracy. • Given the breakneck pace of China’s infrastructure investments over the past decade, the quality of roads and • Quality of feedback mechanisms (QoG) is also positively rail is unsurprising. Likely as a result of this significant correlated with road/rail satisfaction. Again, China is an investment, road/rail satisfaction is higher than the QoL outlier. It manages to sustain high-quality roads and ranking overall (15th) and GDP/capita (20th). highways despite placing dead last in feedback. CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 13

EXAMPLE 2: PRICE CONTROL IN NATURAL MONOPOLIES

Price Control in Natural Monopolies Sub-Index of Quality of Life

Sweden Netherlands United Kingdom Germany Norway Ghana Australia South Korea Canada Switzerland Colombia Israel Nigeria Chile France South Africa Ukraine Kenya Georgia China Russia Mexico Jordan Pakistan Indonesia Brazil Turkey Saudi Arabia Vietnam Kazakhstan Spain United States Philippines Argentina Italy India Egypt 0 25 50 75 100

Price Levels and Political Engagement

Sweden 100 Netherlands

United Kingdom Germany

Ghana Norway

Australia 75 South Korea Canada Colombia Israel Chile Switzerland France Nigeria

South Africa Kenya 50 Ukraine Georgia China Mexico Russia Jordan Brazil Indonesia Pakistan Saudi Arabia Price Levels (0-100) Price Levels Kazakhstan Turkey 25 Vietnam Philippines United States Spain Argentina Italy

India

Egypt

0 Japan 0 25 50 75 100 olitical Engagement (0-100) Political Engagement (0-100) x; Berggruen Quality of Life Index

Source: Berggruen Quality of Democracy Index; Berggruen Quality of Life Index 14 | BERGGRUEN GOVERNANCE INDEX

Price Levels and Corruption

Sweden 100 United Kingdom Netherlands

Germany

Ghana Norway

75 Australia South Korea Canada Colombia Nigeria Switzerland South Africa Israel Chile

France 50 China Kenya Ukraine Mexico Georgia Russia Jordan Pakistan

Indonesia Price Levels (0-100) Price Levels Vietnam Brazil Turkey Saudi Arabia 25 Argentina Kazakhstan Philippines Spain United States Italy India

Egypt

0 Japan 0 25 50 75 100 Corruption (0-100) Corruption (0-100) x; Berggruen Quality of Life Index

Source: Berggruen Quality of Governance Index; Berggruen Quality of Life Index

• China’s price control in natural monopolies (QoL) ranks • Level of corruption (QoG) is also linked to price control. 20th of all countries in the Berggruen Index. This is slightly In this scatter plot, two rough clusters can be observed: lower than it overall QoL ranking of 15th. several Western European (plus Australia and New Zealand) countries who score well on both measures; and a large • This sub-index, which includes energy, telephone and group of countries from the Global South, who fair more medicine prices, is positively correlated with level of poorly. Although China is among the better of the latter political engagement (QoD). China fits this trend,placing group, it is still far closer to OECD countries. near the middle of the pack for both price control and political engagement. CHINA / SUPPLEMENTAL COUNTRY CASE STUDY 2019 | 15

REFERENCES

Ansar, A., Flyvbjerg, B., Budzier, A., & Lunn, D. (2016). Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, 32(3), 360–390. doi: 10.1093/oxrep/grw022

Wildau, G. (2019, March 25). China struggling to quit its debt addiction. Financial Times. Retrieved from https://www.ft.com/ content/d93a95d0-2ee9-11e9-80d2-7b637a9e1ba1

Xi says multi-party system didn’t work for China. (2014, April 2). Reuters. Retrieved from https://www.reuters.com/article/us- china-politics-xi/xi-says-multi-party-system-didnt-work-for-china-idUSBREA3107S20140402 16 | BERGGRUEN GOVERNANCE INDEX

ABOUT BERGGRUEN INSTITUTE

THE BERGGRUEN INSTITUTE’S MISSION IS TO DEVELOP FOUNDATIONAL IDEAS AND SHAPE POLITICAL, ECONOMIC, AND SOCIAL INSTITUTIONS FOR THE 21ST CENTURY. Providing critical analysis using an outwardly expansive and purposeful network, we bring together some of the best minds and most authoritative voices from across cultural and political boundaries to explore fundamental questions of our time. Our objective is enduring impact on the progress and direction of societies around the world. To date, projects inaugurated at the Berggruen Institute have helped develop a youth jobs plan for Europe, fostered a more open and constructive dialogue between Chinese leadership and the West, strengthened the ballot initiative process in California, and created The WorldPost, a global media platform that brings thought leaders from around the world to share ideas. In addition, the Berggruen Prize, a $1 million award is conferred annually by an independent jury to a thinker whose ideas are shaping human self- understanding to advance humankind. 17