June 9, 2008 / 5:06 AM / in 9 years

China economy eyes post-quake gain in social capital

BEIJING (Reuters) - It's callous when nearly 70,000 people lie dead to wonder whether anything good economically could emerge from the rubble of last month's Sichuan earthquake.

But as well as a short-term boost to output as reconstruction kicks in, there is a chance that the outpouring of civic spirit in response to the disaster may not only reshape China's politics but also strengthen its economic foundations.

The idea of social capital as a long-term driver of growth is well known to academics. The U.S. political economist Francis Fukuyama identified social cohesion as one reason why Japan and Germany recovered so quickly after World War Two.

"One of the most important lessons we can learn from an examination of economic life is that a nation's well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society," Fukuyama wrote in his 1995 book "Trust".

Chinese, wary of working together for common purposes in groups beyond the family, appeared on Fukuyama's list of "low-trust societies".

The reaction to the quake challenges that appraisal. Donations of money, goods and blood poured in. An efficient relief operation seems to have strengthened the social contract between the citizenry and a leadership it often sees as aloof.

"Governments need that support which comes voluntarily, and the legitimacy that allows them to rule is derived in part from people's view of how they respond to crises," said James McCormack, head of Asia sovereigns at Fitch Ratings.

Historical Precedents

It's important, though, to keep a perspective. China has a long history of pulling together in times of crises.

In 1906, merchants in Jiangsu province mobilized to feed people after a devastating flood. Outside charity also relieved Shaanxi province when it suffered a terrible drought and widespread famine a century ago.

Chinese researcher Zhao Yandong, who has studied post-disaster recovery, says that if a community has trust only among people who know each other well, its prospects for getting back on its feet are not bright.

"Only when trust breaks through this circle of familiars and expands to include trust in strangers and institutions is the post-disaster revival of victims assured," he wrote in the Chinese-language journal "Sociological Studies" late last year.

One scenario is that if, in a burst of openness, investigations show corrupt, corner-cutting officials are to blame for the collapse of hundreds of schools, new-found trust will be rapidly exposed as hollow, said Oded Shenkar, a business professor at Ohio State University in Columbus.

But economists Ting Lu and TJ Bond with Merrill Lynch in Hong Kong are optimistic that trust can indeed put down deeper roots.

They believe the quake has created a platform for improved coordination and governance. They see signs in the way the disaster was handled of a more open society that will demand more accountability from governments and developers, building trust and trustworthiness.

"Loss of human lives cannot be measured in value, but we believe the loss in physical capital is far outpaced by the gain in social capital, which, through better institutions, could be the single most important factor for long-term stable and sustainable growth in China," they said in a research report.

Olympics Factor

Increased social cohesion, with its hard-to-measure knock-on effects, may well be the main outcome of what should have been China's signature event in 2008, the Beijing Olympics.

China's citizens are likely to be able to take collective pride in a well-run Games.

From an economic point of view, analysts have always been confident that the economy would not grind to a halt once a splurge on Olympics investment ends.

Other capitals have suffered a post-Games growth hangover, but Beijing accounts for just 3.7 percent of Chinese gross domestic product and Olympics-related capital spending made up only 1.0 percent of nationwide investment in 2003-2007.

Yu Xiuqin, deputy head of the Beijing municipal bureau of statistics, has said the Olympics contributed less than 1.7 percentage points to the capital's growth in the seven years since it won the bid.

Of course, it's impossible to guess how many projects across China have been approved in recent years by bankers and planners intoxicated by a patriotic Olympic spirit.

But China has plenty on its wish-list to take up the slack.

Beijing is planning to start building 11 satellite cities. Shanghai has the 2010 World Expo coming. Fierce winter weather this year exposed the shortcomings of China's national rail network and power grid, while a drive to strengthen building standards may well boost investment beyond the quake zone.

Jun Ma, Deutsche Bank's chief China economist, last week raised his 2008 and 2009 GDP forecasts by 0.7 and 0.4 percentage points respectively to reflect a burst of post-quake investment.

Building better schools would be a fitting tribute to the thousands of pupils killed in the quake.

No investment yields better returns than money spent on education. Which makes it all the more unconscionable that the 156.2 billion yuan that the government plans to spend this year on education, albeit up 45 percent, is about half the sum it spent running official vehicles in 2004.

Will the budget be rebalanced radically to help the disadvantaged rather than the powerful?

Will the Communist Party abandon its reflex to keep media and non-governmental organizations on the tightest of leashes?

Will secrecy give way to transparency and accountability?

The quake and the Olympics may set off a chain reaction that means the answer to all those questions will, over time, be yes. But it's perhaps wise to suspend judgment on whether China is graduating from a low-trust to a high-trust society. History is best written well after the event.

Reporting by Alan Wheatley and Chris Buckley; editing by Neil Fullick

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