by Salvatore J. Babones

One year ago I published an article in Foreign Affairs magazine predicting that China’s outsized rate of economic growth would soon slow down to the levels that are typical of other middle-income countries like Mexico, Brazil, and Russia.  Foreign Affairs published my article under the punning but (in my view) inappropriate title “The Middling Kingdom.”  There is nothing middling about China: it is the world’s largest country, the center of one of the world’s great civilizations, and in many ways the most important place on Earth.  But will its economy continue to grow at 10% per year throughout the 21st century?  No.

There is nothing middling about a per capita growth rate of “just” 5%-7%, nor is there anything middling about the size and international influence of China’s economy.  The China hype, however, has been so deafening that anything short of miraculous growth seems a failure.  After all, over the twenty years from 1990 to 2010 the Chinese economy grew on average by 9.6% per year (per capita).  But even 7% annual growth is an incredible rate.  Were China’s economy to grow at 7% per year for the rest of the century, Chinese national income per capita (in today’s dollars) would be roughly $2.5 million.  That’s $2.5 million for every man, woman, and child in China.

In other words, ordinary Chinese would be driving Ferraris and Lamborghinis, living in mansions with manicured lawns, and employing – perhaps the entire populations of the remaining countries of Asia? High-tech Japanese robots? Americans? — As cooks, cleaners, and nannies to cater to their every whim.

This scenario is unlikely.

Assume a more modest 2% per year growth rate for the rest of the century, and China’s national income per capita will rise to something like $33,000 in today’s money.  That seems more reasonable.  Give China the rest of the century and the whole of it will look something like what Hong Kong looks like today.  That would be quite an accomplishment.  After all, it was not so long ago that China was a poor, agricultural country subject to regular floods and famines.  Were all of China to raise its living standards to the equivalent of 2012 Hong Kong within this century, it would represent a major accomplishment not only for China, but for the world.

For the sake of the well-being of a billion or more people, I sincerely hope that China can pull this off.  Consistent 2% growth may sound like a modest goal, but few countries in history have managed to sustain growth rates of over 2% per year for periods of a century or more.  A century is a long time.  Depressions, revolutions, civil wars, and collapses of all kinds usually intervene.  There is no reason to believe that China will not navigate all these perils and more, but there is no reason to assume without question that it will.

The ridiculous logic of compound growth

As an optimist, one takes a long-term comparative and historical view — sustained 2% growth is rare but possible.  If China can avoid serious internal turmoil, avoid external wars, and address its environmental challenges, it stands a good chance of maintaining 2% growth for the rest of the century.  After 2100 or so all bets are off, since by that time global climate change will start to reach such catastrophic proportions that the world as we know it will cease to exist.  The relevance that national income growth statistics will have in the post-apocalypse world of the 22nd century is anyone’s guess.  But like everyone else, I am bullish on China.

Where I disagree with just about everyone else is on just what it means to be ‘bullish on China’.  What’s a successful growth rate?  Writing in Foreign Policy magazine, Nobel Prize winning economist Robert Fogel recently reaffirmed his prediction that China will continue to grow at an average annual rate of 8% until 2040, by which time China will be twice as rich (in per capita terms) as Europe.  In terms of the overall size of its economy, Fogel predicts that “China’s share of global GDP — 40 percent — will dwarf that of the United States (14 percent) and the European Union (5 percent) 30 years from now.”

Though not an economist I do have a calculator.  Fogel’s 30 more years of 8% growth would put Chinese national income per capita on par with that of Sweden today.  By Fogel’s math, today’s Chinese 10-year-olds will be living in Scandinavian luxury by the time they reach middle age.

But why stop there?  An economy growing at 8% per year doubles roughly every ten years.  Does Fogel have a crystal ball that shows him that China’s economy will double every ten years for the next three decades, then stop?  Why not four decades?  Then a billion Chinese could all live at a standard of living equivalent to that of Luxembourg today: Another decade, another doubling.

If anyone in China seriously believes that the Chinese economy is going to double in real output per person every decade for the next three decades, would the Shanghai stock market index have fallen 20% this year?  Would the Chinese leadership be worried about potential civil unrest?  Would rich Chinese be trying to move their money — and their children — out of China?

The fact is that China’s last two decades of rapid growth have been unprecedented.  There may be another two decades of unprecedented growth, followed by another two decades of unprecedented growth, but this would be… unprecedented cubed.  In the real world, unprecedented cubed just does not happen.  The simple fact is that China’s growth will slow down; it is just that we do not know exactly when.  There are, however, good reasons to believe that the answer is: Within this decade.

Why now?

There are two big reasons why we should expect China’s growth rate to slow down in the 2010s.  One is that as countries grow toward the global income horizon represented by the richest countries in the world, growth gets harder.  The second is that China’s last twenty years of rapid growth have represented a rebound from a previously depressed level, not growth from a previously stable base.  In short, China’s growth will slow down because China is no longer catching up.  It has now caught up to a typical level for non-western continental countries.

First, economic models of the kinds used by Fogel and other economic forecasters tend to underemphasize the fact that as countries grow — growth gets harder.  As countries move up global value chains from producing simple manufactured goods to profiting from the creativity of their citizens, they rise less and less rapidly.  It took Korea 30 years (1960-1990) to move from having 1/30 of the US level of GDP per capita to having 1/3.  It then took Korea the next 20 years (1990-2010) to edge up from 1/3 to 1/2.  Korea is still a long way from catching up with the US, or even Spain.  Similarly, Japan caught up with the west (and by some accounts exceeded it) in the 1980s.  Its last year of rapid economic growth was 1990.  Its economy has grown by an average of 1% per year ever since.

What is more, Korea and Japan have been far more successful than the vast majority of other countries.  They can hardly be taken as typical examples of global, or even Asian, growth trajectories.  They prove that sustained growth is possible (up to a point), but they do not prove that it is likely.  Quite the contrary: Korea and Japan have enjoyed extraordinarily atypical growth advantages compared to most other countries.

Japan is the one major non-western country ever to have risen to the top of the world-economy.  Japan, of course, is exceptional in many ways.  It is the one non-western country to have conquered and exploited a large colonial empire early in its development.  Then, in the post-war period, Japan had imposed upon it a US program to remake Japan in its own 1940s image.  Japan implemented state-directed economic planning for the broad development of the entire country, urban and rural.  In a wrenching fiscal transition the Japanese state went directly from financing itself through indirect consumption taxes that fell mainly on the poor to a highly progressive income tax with a top rate of 75%.  It also pushed interest rates on savings low artificially (while preventing people from moving their money out of the country), a further, indirect tax on the wealthy.  The Japanese state did more than any other governing apparatus in history to force its people into development.

Korea and the rest of the four “Asian tiger” economies (Hong Kong, Singapore, and Taiwan) moved from low to high incomes in little more than a generation.  None of these states, however, is in the full sense a country.  Hong Kong and Singapore are obviously city-states.  Is Hong Kong a rich country, or a rich jurisdiction in the larger, middle-income Pearl River Delta economic zone?  Is Singapore a rich country, or a rich jurisdiction that was able to separate itself politically (and thus statistically) from its hinterlands in Malaysia and Indonesia?  It is hard to see Singapore and Hong Kong as exemplars for the continuing development of a continental country of more than 1 billion people.

In many ways Taiwan and Korea are also not much more than city-states.  In Taiwan, the extended Taipei metropolitan area makes up 38% of the national population.  In Korea, metropolitan Seoul makes up 42% of the population.  Moreover, in both cases the capital city is the richest part of the country.  Recent years have seen the rise of city incomes world-wide.  If the Moscow region were a country, it would be as rich as Korea or Taiwan.  It is only the statistical dead weight of the Russian hinterland that makes continental Russia appear much poorer than peninsular Korea or insular Taiwan.

China is much more like Russia — well, much more like 10 Russias — than it is like Japan or the four Asian tigers.  It is a post-communist state characterized by massive income inequalities, an unwillingness of the rich to pay taxes, and relatively undemocratic governance structures.  There is no more reason to expect perpetual 8% growth from China than there is to expect it from Russia.  The difference between China and Russia, however, is that while Russia exited communism as a relatively rich country, China exited communism dirt poor.  Thus while Russia adjusted down when it joined the capitalist world-economy, China has adjusted up.

This is the second reason why China has been growing so rapidly since it abandoned communism in all but name: China’s economy was so badly depressed in 1980 that there was nowhere to go but up.  Until 1950 China was wracked by colonialism, occupation, and civil war.  Then came Maoism, the Great Leap Forward, and the Cultural Revolution.  Just removing the most destructive pressures on the Chinese economy was enough to spark rapid growth.  China’s leadership since 1980 has been neither extraordinarily active nor extraordinarily capable.  It has simply not been suicidal.

Let’s put things in perspective: China today generates a national income per capita of around $5500 per year.  That is roughly the level of the Dominican Republic or Peru.  It is less than half the national income per capita of Brazil or Russia.  After 20 years of double-digit growth, China is still a poor country.  It has risen from being dirt-poor to being moderately-poor.  That is a wonderful thing, but it should not be blown out of proportion.  We should not let the skyscrapers of Pudong blind us to the fact that China is still a poor country.  Pudong is just the tip of the iceberg.

Return to normal

While China’s recent growth has often been characterized as a return to China’s historical place in the global economy, this argument is more clever than correct.  According to figures compiled by the late economic historian Angus Maddison, China last reached parity with the west around the time of Marco Polo.  China’s decline relative to the west long predates the industrial revolution, the era of western colonialism, or even China’s 16th century inward turn.  China may have been using coal, gunpowder, and paper money as early as the thirteenth century, but the thirteenth century was a long time ago.  China has been (relatively) poor ever since.

That is not necessarily China’s fault.  The overarching story of the past five centuries has not been so much one of absolute Chinese decline as of relative western advance.  European economies grew substantially between 1500 and 1800.  Already by 1820 — before the advent of the railroad, the telegraph, or the modern steel industry; before the Opium Wars, the colonization of Hong Kong, or the Boxer Rebellion — China’s relative national income per capita was less than 50% of European levels.  By 1870 it was around 25%.  In the century from 1870 and 1970 Chinese relative incomes deteriorated from 25% of European levels to just 7%.

All of Maddison’s figures are purchasing power parity estimates, meaning that the real situation (in hard currency terms) was far worse.  According to hard currency World Bank statistics, relative Chinese GDP per capita reached a low of less than 2% of US levels between 1976 and 1994 and is still under 10% of US levels.  Purchasing power parity tends to flatter the economic statistics of poor countries because labor is cheap in those countries.  It is wrong to rely on them when projecting growth, since as a country grows it loses its purchasing power advantage.  If you use purchasing power parity figures, China looks richer now, but it is even less likely to grow in the future.  It is completely inappropriate to estimate China’s current position using purchasing power parity but to project its growth in real hard currency.

Put all these figures together, and China’s massive economic growth of the past two decades has done nothing more (and perhaps much less) than return it to its 1870 situation vis-à-vis the west.  This can be interpreted in two ways.  The optimist will see this as further evidence of China’s potential: If China is still stuck at 1870, there is still plenty of room for further growth.  The pessimist could point out that if China once fell from this level in 1870, it might well fall from this level again.  Further Chinese growth will require that all non-economic factors continue to break China’s way.

What should “normal” look like for China?  Well, there are other examples of large middle-income countries that suffer from massive capital flight and brain drain: Brazil, Mexico, and Russia come to mind.  These are roughly twice as rich as China is currently, giving China another decade of growth at 8% or (more likely) another few years at 7%, followed by a few years at 6%, followed by a few years at 5%, etc. until growth rates stabilize in the range of 1% – 2% that has long characterized these countries.

On the other hand, these richer peer countries are all at least quasi-democratic, while China is not.  There are no large authoritarian countries in the $10,000 per year national income range.  That does not mean that China must become democratic to grow, and it does not mean that China will not become democratic as it grows. The idea is provocative: Will China become the only authoritarian major middle-income country in the world?  It is impossible to say.  But the idea that China will leap-frog all these countries to reach western levels of national income within a generation seems increasingly fanciful.

Structural barriers to future Chinese growth

The arguments presented above are mainly comparative and historical.  There are also structural reasons to suspect that China’s rapid growth has mainly run its course.  In fact, China faces a series of political, ecological, and demographic barriers to continued rapid economic growth.  Of these three, the demographic barriers are likely the most impassable.

The political barriers to rapid GDP growth in China, however, are the ones that have received the most attention.  Many analysts believe that China will not be able to move up into higher positions in global value chains unless it adopts a more open political system.  The argument is that high value added activities like branding, design, and invention require the kinds of free thinking that are only possible in a democratic society.  China may educate hundreds of thousand of engineers, but if it stifles their creativity and prevents them from asking questions they will never succeed at the highest levels of the global economy.

This is either wishful thinking or fancy rhetoric designed to convince Chinese leaders of the need to open up their political system.  It is based on a false premise that equates “China” with “Chinese schools, companies, and people.”  It is doubtless true that Chinese schools, companies, and people must learn to innovate more than they have in the past.  It is just as true that they are now doing this — enthusiastically.  It is possible that the expansion of independent thought in China will lead to a more democratic China, but to put democracy first is to put the cart before the horse.

The ecological barriers to continued growth are better-documented.  China’s air quality is terrible.  Its rivers flow with toxic chemicals, when they flow at all.  Groundwater resources are nearly tapped out and the Gobi desert is rapidly expanding.  Even China’s State Council concedes that the massive Three Gorges Dam is plagued by “urgent problems [that] must be resolved regarding the smooth relocation of residents, ecological protection, and geological disaster prevention.”  The last of these concessions is particularly frightening.

China’s recent droughts and floods may or may not be related to its environmental record, but it is clear that China’s ability to monetize its environment by promoting economic growth at the expense of ecological devastation is coming to an end.  China’s future growth will have to be cleaner than its past growth, and thus more expensive.  The low-hanging fruit has already been picked — literally.  High-density China always had one of the most intensively exploited environments in the world.  In today’s China there is little environment left to exploit.

The greatest barriers to China’s continuing rapid economic growth, however, are structural.  Two temporary demographic bonuses that have dramatically boosted China’s growth potential have now run their course: Declining fertility and increasing urbanization.  Both have led to massive increases in economic productivity, but both are finite processes that cannot continue forever.

China’s fertility rate was already falling well before the implementation of its draconian one-child policy beginning in 1979.  The 1970s fertility decline meant that families and the state could focus their limited resources on smaller numbers of children.  Perhaps more importantly, low fertility rates have freed up adults (particularly women) to enter the formal labor market.  This means that hundreds of millions of women who otherwise would have been working at home are now working outside the home. Fertility-related changes in the age structure of the population have also led to a one-time boost in economic output.

The second temporary boost has come from increasing urbanization.  Urbanization increases national income because urban populations are far more productive than rural ones.  It also increases national income because people living in urban areas typically work outside the home in paid employment, while many rural people engage in unpaid subsistence farming.  China’s urbanization rate is still well below western levels, and China’s urbanization will not hit the buffers anytime soon.  At current growth rates, China will not reach typical western or Latin American levels of urbanization until the 2040s.  This suggests that China still has some room for continued growth, but even this cannot last forever.

Ultimately, both fertility decline and urbanization must run their course.  Fertility cannot decline below zero; urbanization cannot increase beyond 100%.  Declining fertility and increasing urbanization have helped fuel China’s extraordinarily rapid growth rate; without their impact, the Chinese economy may continue to grow, but it can’t possibly grow at the same rate as it grew with then.  The demographic party is over, or at least coming to an end.

The Chinese century?

Structure is not destiny.  China might well grow right through the middle income levels of the world-economy, or even right through the upper income levels (as Fogel confidently predicts), without ever looking back.  If it does, China’s growth will provoke a complete realignment of the international system.  A highly militarized country of over a billion people living at US income levels would dominate not only east Asia, but the world.  The twenty-first century will be the Chinese century, pure and simple.

Seen in retrospect, the twentieth century was unambiguously the American century.  Like Henry Luce, many people said so at the time.  Many other people, however, thought it was more likely to be the Soviet century.  Americans fretted over the Red Scare and seriously questioned their hegemony over the world’s politics.  Rightly or wrongly (wrongly, as it turned out) many political commentators and serious scholars either rooted for or worried about the future Soviet domination of the world.  America fought a disastrous and destructive war in Vietnam on the basis of George Kennan’s domino theory that were Vietnam to fall to communism, America would ultimately be reduced to a capitalist fortress surrounded by a hostile world.

The parallels between the 20th century Red Russian Scare and the 21st century Red Chinese Scare are pretty remarkable.  Like 20th century Soviet Russia, 21st century China is a large, growing country that is much poorer than America but rapidly catching up.  Like 20th century Soviet Russia, 21st century China is a continental power with massive numbers of troops in uniform.  As Russia threatened America’s absolute dominance of Europe, China threatens America’s absolute dominance of Asia.

There are other strategic parallels as well.  America’s 20th century allies in Europe were all richer and more technologically advanced than Soviet Russia and probably could have contained Russia on their own, even without American help.  Similarly, Japan, Korea, and Australia can easily match China’s current air and sea forces.  Even if China wanted to invade someone — and there is no reason to think that it does – it is hard to imagine what American ally it could successfully invade.  Throw the American Navy into the mix, and it is clear that China does not even have regional superiority, let alone the kind of global reach the 20th century Soviet Union aspired to.

When all is said and done, it is likely that the 21st century will in retrospect turn out to have been just as much an American century as the 20th was.  China’s rise is provocative, but China lacks the one thing that made the similarly-resourced Soviet challenge to American supremacy at least credible: An appealing ideology.  The Soviet Union could always to some extent challenge America by challenging the inherently unjust capitalist system on which American prosperity was based.  China, by contrast, has embraced the worst socioeconomic ills of capitalism without acquiring even the fig leaf offered by political democracy.  There will be no Chinese fifth columnists in the west, or anywhere else.

Pundits love to speculate on a post-American future in which we will all learn Mandarin and wait as supplicants outside the gates to the Forbidden City for the Chinese authorities to grant us an audience.  The facts, on the other hand, say “not in this century.”  China’s century may finally come in the twenty-second, but it is clearly not here in the twenty-first.

As I wrote a year ago, it is time to start treating China like a large but ordinary country.  Put aside the hype and put aside the panic, and what is left is a country that suffered terrible tragedy for two hundred years that is finally returning to normal.  As with any country, its moves toward liberal democracy should be applauded and its continuing repression should be condemned.  But we should neither relish nor fear the prospect of Chinese domination.  China has enough problems of its own to deal with.  It is unlikely to want to take on ours as well.

[Thank you indeed Salvatore for this contribution]

The writer is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies (IPS). His website is http://salvatorebabones.com

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