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What is the future of China’s economy? Will it become a high-income economy and thus inevitably become the world’s largest economy for an extended period of time, or will it fall into a “middle-income” trap and grow on par with the United States? This is a crucial issue related to the future of the world economy. It is also important for the future of global politics.
The meaning can be seen in a very simple way. According to the International Monetary Fund, by 2022, China’s per capita gross domestic product (measured by purchasing power) will reach 28% of the US level. This is almost exactly half of Poland’s relative gross domestic product per capita. It also ranks China’s GDP per capita at 76th in the world, between Antigua and Barbuda (above) and Thailand (below). Yet despite its relative poverty, China’s gross domestic product (measured this way) is the largest in the world. Now, assume that its relative gross domestic product per capita doubles to that of Poland. Its GDP would then be more than twice that of the United States and greater than that of the United States and the European Union combined.
Matters big and small. China will definitely remain a populous country for a long time to come. For example, according to the United Nations, by 2050, There are still 1.3 billion people.
Therefore, the question about China’s future in the world can be reiterated in the following way: Can China achieve the level of prosperity that Poland has achieved relative to the United States? This would further double its relative GDP per capita. Is it really that hard? Before drawing this conclusion, it is worth noting that in the 42 years from 1980 to 2022, China’s GDP per capita rose from 2% to 28% relative to the United States. That’s almost four times. Is it unthinkable to double it again, say in 20 years?
A comparison might help answer this question. South Korea was a country that came close to China’s performance in the post-World War II period. In the early 1960s, its per capita GDP was about 9% of the US level. Starting in 1980, it took China about a quarter of a century to reach this point. By 1988, South Korea reached 28% of the US level, which is the current level of China. By 2007, South Korea had reached 57% of the US level, which is today’s Poland. It has now reached 70%. If China reaches this level, it will reach the relative level of Poland by the 2040s, the relative level of Poland by 2022, and 70% of the US level by the 2050s. This will be a new world. (See chart).
Before rejecting this comparison out of hand, some mistakes must be avoided.At present, China’s economic slowdown, over-reliance on real estate investment and its financial vulnerability. All this is understandable. But it could also be exaggerated. South Korea has encountered several major crises. Especially the debt crisis of 1982 and 1997 Asian financial crisis. However, in response to these shocks, South Korea adjusted and moved on. It did not experience a long period of relative stagnation like Japan did after 1990. By contrast, South Korea, which had a per capita GDP one-third that of Japan in the 1950s, is now richer than its former imperial masters. By the way, Taiwan is doing even better than South Korea. No wonder so many Taiwanese want to remain independent.
To be sure, one could come up with a long list of reasons why China must have hit the end of the road in its astonishing pace in catching up with the technologically advanced economies. These include aging populations, structural imbalances, financial fragility, global environmental degradation, and today’s authoritarian and oppressive governments. These are entirely reasonable points.
The most intractable economic problems are over-reliance on credit-driven investment rather than consumption as a source of demand, and over-reliance on capital accumulation rather than innovation as a source of increased supply. Therefore, from 2009 to 2022 (inclusive), the contribution of growth in “total factor productivity” (a measure of resource utilization efficiency) averages about 0.5 percentage points per year, which is far lower than the 2 percentage points per year from 2000 to 2008. This is too slow.
However, the advantages of this vast country are also worth remembering, Cultivate 1.4 million engineers every yearIt has the busiest patent office in the world, has a highly entrepreneurial population, and shows world-leading potential in electric vehicles (to name just one). In terms of information technology, it seems to be far ahead of the Europeans. To sum up, is China really unable to compete with Poland?
The biggest questions about China’s economic future involve domestic and global politics. Domestically, does China’s leadership want to continue rapid growth, or is it now inclined to believe that stability is preferable? Is it ready to take the necessary steps not only to increase demand now, but also to address structural issues such as over-saving and over-investment, over-reliance on the housing market, and over-leverage? Is it ready to let private businesses take charge again, or is it determined to keep them under firm (and inevitably daunting) control? Can it convince the Chinese people that, after experiencing the trauma of the COVID-19 epidemic, they can once again be confident about the future? Adam Posen, Peterson Institute for International Economics Argue forcefully that they cannot. I do not believe. In the late 1970s, they underwent larger changes. Of course, leadership has also changed. Will it happen this time too? Or will it be fixed for the next few years?
Equally important is the adverse global environment. China’s access to world markets and technologies is deteriorating. There is even the danger of war. It takes great determination to overcome the former, and wisdom to avoid the latter.
So, yes, it is possible that we are indeed witnessing the end of China’s rise. But it’s not inevitable. The bottom line is that what happens will depend more on China’s choices than on Western desires.
martin.wolf@ft.com
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