Business Journal

China's Puzzling Flat Line

The country's economic rise has been staggering. So why aren't life evaluations budging?

China's meteoric rise may have begun with Deng Xiaoping's economic reforms more than three decades ago. But its pace has not slackened much in the 12 years that Gallup has been asking Chinese people to rate the quality of their lives.

Since 1999, China's GDP growth has averaged about 10%, falling to a "mere" 9.1% in 2009 amid the global recession before rebounding to double digits in 2010. The country's economic expansion has been so torrid in recent years that Chinese officials have devoted considerable effort to slowing growth in some sectors lest they overheat.

In 2010, China's estimated per-capita GDP (adjusted for purchasing power parity) was $7,536 -- about 3½ times as high as it was in 1999. However, the increase seems to have had little effect on one of Gallup's most basic wellbeing indicators: life evaluations, which have remained relatively consistent over the last 12 years. Specifically, Gallup asks respondents to rate their lives on a 0-to-10 "ladder" scale based on the Cantril Self-Anchoring Striving scale. The average life ratings in China have been stalled just below 5.0 since 1999.

How Chinese Rate Their Current Lives

China's 2010 overall average rating of 4.7 places it below most other countries surveyed in East Asia and Southeast Asia that same year. The average current life evaluation was higher than 6.0 in the region's most economically advanced countries: Singapore (6.5), Japan (6.1), and South Korea (6.1). But several Asian countries with estimated per-capita incomes lower than China's also posted higher average life ratings. In fact, among all East and Southeast Asian countries surveyed last year, only Mongolia and Cambodia had average ratings on par with or lower than China's.

Life Ratings in East Asia and Southeast Asia

Does income matter for life ratings?

Why haven't average life evaluations climbed more notably among Chinese over the past 12 years of skyrocketing economic growth? One hypothesis is that cultural factors lead Chinese people to avoid using material wealth as an appropriate basis for evaluating their lives. Perhaps the influence of Confucianism, which stresses moral rectitude and the quality of human interactions over material things, leads Chinese to attach less significance to changes in their personal wealth.

But the data don't entirely support this theory. Among Chinese interviewed in 2010, average life ratings climbed steadily with respondents' income levels. Those whose self-reported income was in the top 20% gave an average life rating of 5.7 -- more than two scale points higher than the 3.6 average among those with incomes in the bottom 20%.

How Chinese Rate Their Current Lives: Income Levels

There are also differences in life ratings between Chinese living in urban areas and those living in rural areas -- as one might expect given commonly cited concerns about income inequality between China's dynamic eastern cities and the vast rural areas to the west. Since 2004, rural Chinese have rated their lives significantly lower than those living in large cities or suburbs. That gap has widened somewhat since 1999, though life ratings have not changed dramatically among either group.

How Chinese Rate Their Current Lives: Urban Versus Rural

But if economic considerations are good predictors of the way Chinese people view their lives, then the country's trend of flat life ratings remains a puzzle. Another possible explanation is that as living standards have risen in China, so have people's expectations for the quality of their lives. This idea comes from a theory in behavioral economics often referred to as the "hedonic treadmill," which states that people rapidly adjust their hopes and desires to reflect changes in their life circumstances. For example, a person's life satisfaction may not change even if her income is gradually rising, particularly if she feels that everyone around her is getting richer as well.

China must rebalance its economy to better align consumption with production.

Changing expectations may represent part of the explanation of the puzzle of China's lackluster life ratings. A 2009 study of households in rural China by researchers at the University of Oxford concluded that respondents' aspirations rose with their incomes, and unmet aspirations lowered their subjective wellbeing. But other researchers, including Gallup Senior Scientist Justin Wolfers and fellow economist Betsey Stevenson, have challenged the theory. In 2008, Wolfers and Stevenson used Gallup's global data to argue that both across and within countries, changes in absolute income levels affect life evaluations at least as much as changes in relative income levels.

China's neglected consumers

In China's case, another fact may influence the disconnect between the country's rising GDP and stagnant life evaluations: Rapid economic growth has translated into a considerably less dramatic increase in the actual income of most Chinese citizens. That's because China's growth has been much more heavily investment-driven than consumption-driven. In other words, China's capacity to produce consumer products has far outstripped its people's ability to purchase them. Currently, just 36% of China's GDP is accounted for by private consumption, well below the percentage in other major economies.

This imbalance is also influenced by a culture of thrift that has produced the world's highest personal savings rate. However, economists note that it is also a consequence of China's development strategy, which has subsidized manufacturing and infrastructure growth at the expense of the consumer. Chinese monetary policy reflects this focus. For example, the yuan is undervalued relative to foreign currencies, which makes Chinese goods cheaper in foreign markets; the Chinese government also maintains low interest rates on Chinese household deposits to provide cheap access to capital for public and private investors. The results have allowed China to become an exporter to the world and to build world-class cities like Shanghai and Guangzhou.

In recent years, however, experts have warned that China's economic development strategy -- its investment in the business sector and in infrastructure -- has led to underdeveloped consumer markets, dampening the effect of the country's extraordinary growth on the lives of ordinary citizens. As with life evaluations, Chinese adults' satisfaction with their living standards has risen little over the last 12 years. Two-thirds of Chinese (66%) said they were satisfied in 2010, up slightly from 61% in 1999. The trends among urban and rural Chinese have been similar, particularly since 2007.

How Chinese Rate Their Standard of Living

The upshot is that while China's growth has greatly reduced poverty through expanded welfare services and access to vital infrastructure such as healthcare and education, many Chinese are not seeing as dramatic a change in their day-to-day purchasing power. That makes them vulnerable to growth-induced inflation in food and housing prices, which might be another factor keeping them from radically reassessing the quality of their lives.

Implications

The Chinese government is now clearly focused on strategies geared toward more rapidly changing the living standards of the country's consumers. The global economic crisis highlighted the limits of global markets' ability to absorb China's huge trade surpluses over the long term and reinforced the notion that to continue its rise, China must rebalance its economy to better align consumption with production.

In recent years, consumer stimulus programs have offered rural Chinese rebates for purchasing home appliances and subsidies for upgrading their vehicles. Such efforts may be having some effect; a Gallup analysis from 2010 indicated that consumer demand had already begun to rise.

However, some experts argue that such measures should be accompanied by longer term efforts to place a greater share of the country's income in the hands of the millions of household consumers who aren't already profiting from the production boom. That would require difficult policy reforms that divert some of the capital currently available for investment and infrastructure.

But it may also help drive improvements in life evaluations and other essential wellbeing metrics that would indicate Chinese consumers are more fully participating in their country's historic economic rise. Such wellbeing gains are crucial to China's future -- not only as a matter of social justice but as a way to put the country on a more sustainable path to long-term economic success.

Steve Crabtree is a writer for Gallup. He contributed to writing Building Engaged Schools, Gallup's book on education reform. Learn More >>
Tao Wu is a Senior Practice Expert for Gallup.
Gallup http://www.gallup.com/businessjournal/148853/China-Puzzling-Flat-Line.aspx Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A +1 202.715.3030