China, by many measures still a developing country, became the world’s largest international trader in 2009. A central question now is whether Chinese growth over the next 20 to 30 years on this, or even a more modest scale, can be sustained, given the significant impact it will have on the domestic as well as global economic and politics.
The consensus is that the Chinese economy will continue to expand at an annual rate of 6 to 8 per cent in real terms for the next twenty years (2010-30). There are other more bullish, and of course more conservative projections. But even growth at the consensus rate over the next twenty years would make China the largest economy in the world with per capita incomes perhaps four or five times as high as they are currently. China’s nearly 1.5 billion people on this trajectory are set to join the richer people in the world.
There are many challenges to achieving the consensus goal of long term growth.
First, the one child policy and the impact of income growth on fertility will see China’s demographic structure rapidly age. Aging of the population will constrain the supply of labour, put pressure on wages, reduce the capacity to save, change industrial structure and the composition of trade, and make building human capital, accelerating technological change and raising productivity more urgent national priorities.
Second, China is entering a stage of growth in which the relationship between an increment in output and an increment in demand for energy and metals is exceptionally strong, This will add pressure to balancing global supply of, and demand for, resources and energy products. The impact on world markets for energy and resources is likely to be intense.
Third, and a related issue, China will have to move more rapidly towards a low-carbon growth economy. This will require accelerating the pace of change in industrial structure, and a faster pace of technological innovation in the energy-using sector of the economy than was achieved in the industrialisation of already-developed economies. The policy commitments towards this goal are still being put in place.
Fourth, in the next twenty years, China will not be able to rely on the economic model that drove growth over the past two decades. That model saw the emergence of unsustainable current account imbalances. The next phase of growth requires a strategy of domestic market integration and internally driven development. And it requires a China actively involved in global cooperation to achieve balanced growth in the global economy, so important already are the effects of China’s strategies on the international economic system.
Fifth, China also needs to deal with the income inequality and regional disparities that have grown in the course of rapid growth. Failure to deal with domestic inequalities will threaten social stability in the next phase of growth and development.
Finally, China’s rise as a global economic powerhouse will thrust on it the mantle of increasing responsibilities in global affairs, requiring it to contribute positively to global stability, progress and prosperity through cooperation with other players in the global economic system. This is not merely a question of how China manages its external economic relations but a question also of how it conducts itself politically.
If China succeeds in meeting these challenges, the coming couple of decades will see it elevated to a position of global primacy, or at least ‘co-primacy’ alongside the United States.
Success is more easily presumed than achieved. A smooth Chinese ascendancy to global primacy, both for China and the rest of the world, will need many changes from the status quo.
For China, perhaps the most important challenge will be confronting the task of comprehensive institutional reform — in the economic system, in governance, as well as in the political system. Failure to proceed with comprehensive institutional reform will jeopardise continuing growth and the global market integration and stability of which it is based. It also risks various forms of economic dislocation at home as well as social instability which will disrupt the growth process and negatively impact on the global economy.
Without economic, structural and political adjustments in the rest of the world to China’s rise, there will be economic and political tensions that will frustrate, though likely not prevent the redistribution of power in the world economy.
China is still well short of the point in the process of economic development where its growth might be expected to slow or the energy, resource and carbon intensity of growth to recede. Rapid manufacturing-led growth is expected to persist for some time whatever indicators of success are used — the projected increase in China’s per capita income, auto penetration, metals and energy intensity, capital stock per capita or the level of urbanisation.
Yet the momentum of growth at its current pace, even that maintained through the global financial crisis, is unlikely to be sustained in the medium term without addressing these big issues of development strategy — structural and institutional reform; the unwinding of imbalances and government fiscal measures to boost the economy. Unattended to, there are likely to be lower rates of economic growth in the next few years. A global environment in which carbon constraints become increasingly binding will also lower the growth trajectory in the medium term.
Enhancing technological progress holds one key to China’s long term growth success. There is huge potential for China to narrow the technological gap between it and the mature industrialised economies, particularly in the area of green technologies. Government will play a crucial role. With the effort and investment made by the government, it may well be that China will catch up more quickly and could even assume leadership in the application of green technologies, particularly considering the economies of scale associated with their use in China’s projected mega-market, its strong foundation of human capital and determination to adopt a new model for economic growth. A concerted effort to generate and commercialise environmentally sound technology would enable China to quicken the pace of industrial structural change and alter the current trajectory of its industrialisation, laying a more solid foundation for its goal of long term growth.
As in the past thirty years, the market must also play a crucial role and development of market integrity alongside the role of the state will be at the core of the challenge for China in achieving its ambitions for development.
Ligang Song is Associate Professor and director of the China Economy Program at the Crawford School of Economics and Government, Australian National University.
Song’s article is a very interesting and useful one.
I would like to comment on some points in the article.
First, some challenges are also opportunities, as touched in some parts of the article. For example, the so called low carbon economy can be both extremely challenging for the world as a whole because it will represent as an additional constraint and possibly very rewarding for some economies. Assuming the presumed low carbon economy or changing towards it will be true in the next couple of decades, one has to consider not only from an absolute advantage, but also a comparative advantage point of view.
From that point, there will be very different implications for different economies. For some, it may be a double whamming, while for some it may be a new, rare and extremely valuable development opportunity.
Secondly, while it may be perceived desirable to have a systematic institutional reform, history does not necessarily prove that it is always feasible and realisable. China’s economic reforms in the past 30 years or so was on the premise of “cross the river by touching stones” as opposed to a well designed, systematic, big bang approach to reform.
Thirdly, it may be more pertinent to talk about systematically economic reforms in China 30 or even 20 years ago, the reform tasks in that front, while still incomplete, are largely accomplished.
Fourthly, political reforms, while undoubtedly extremely important in the long run, can be equally extremely tricky and difficult. What is the target “model” for political reforms for China? While many people either explicitly or implicitly assume the western style political system as THE model for China to follow, is it an inevitable end and/or path of the political reform?
Fifthly, in terms of the process or stage of economic development, while China’s growth might not be expected to slow, it does not necessarily mean that its energy, resource and carbon intensity of growth will not recede, as Song states. Definitely the intensity of energy, some resources and carbon of the Chinese economy as a whole is likely to decline. I guess this is the reason and underlying logic why the Chinese government has proposed for its carbon intensity to decrease by 40-45% by 2020 over that of 2005. 40-45% reduction is by no means a small recession in the intensity.
So my view on China’s impact on many things is that it is now at a very interesting stage where there will be a sharp difference in terms of the absolute and relative magnitude. The next phase of the Chinese economy is likely to increase the share of quality growth in its total growth as opposed to a sheer focus on quantity growth. The implications of that transformation on many things, especially on resources, will be very interesting to see.
We perhaps need to borrow an analogy to the adaptive and rational expectations theories in analysing the Chinese economic growth for the next decade or two.