The Chinese growth trap that could cripple Beijing’s economy

The Chinese labor force peaked in 2017 with 787 million people. Demographics say the fall will continue. There is some leverage to increase the number of people who work. The participation rate of women can be improved somewhat. Now it is around 43 percent versus 75 percent for men. Lessons from other countries make it clear that this is easier said than done. Chinese women have decided to prioritize their careers over raising a family. The one-child policy (1979 to 2016) resulted in an imbalanced sex ratio. For the under twenty-four age group, there are more than 110 boys for every 100 girls. On the political front, the Chinese Communist Party (CCP) has just relaxed the rules for having children and could see a drive to get more women into the workforce as reversing this policy shift.

Over the past decades, several countries have tried to get out of the demographic trap by improving productivity defined as higher production per factor of production: how much additional production can the system derive from an hour of work? OECD statistics show how difficult it is. Despite strenuous efforts, the average annual productivity growth in Japan since 2005 has been less than 1%. Italy, also a country with a declining population, did even worse with annual productivity growth of less than 0.5%. The euro zone is at 0.8%. Great Britain at 0.6 percent. The United States does better with 1.25%.

China has undoubtedly studied the Japanese test to know which policies work and which do not. Sadly, the Japanese economy has been stagnant for about three decades, so there isn’t much help there.

More technology improves productivity, primarily and immediately for young workers entering the workforce. They have the skills to use it. But the catch is that the size of a cohort is small compared to the total labor force. It takes time before a tangible part of the workforce has new skills. Workers should undergo training and education to ensure that handling and operating processes make full use of the performance built into new technologies. The skills of workers must be continuously improved.

Such policies have been implemented by some European countries, mainly welfare companies or, better yet, those which have succeeded in combining a welfare state with a competitive economy. But it costs a lot of money, which begs the question of how to finance them. A growing share of Chinese companies are at least partly private, and they may be reluctant to be asked to share the financial burden. State-owned enterprises account for 25 percent of the economy and are mostly found in high-tech sectors, precisely among the group of companies expected to start upskilling first. But we do not know how they will react, what leverage they have vis-à-vis the State and how they are managed. Workers themselves need to be assured that training will not lead to unemployment or lower wages. Workers and unions must be partners convinced that it benefits them and that it is not a racket to increase profits.

Chinese civilization is rich in inventions. Paper, movable-type printing, gunpowder, the compass, the mechanical clock, cast iron, to name a few of the most important, date back to China. But the frightening observation for the executives is that none of them transformed society in the same way that the steam led to the industrial revolution in Europe. The mountain to be climbed in the coming decades is to integrate inventions into society and accept the concomitant profound changes, which may transcend mainstream thinking and the current political philosophy defined by the CCP.

The Western view is that an innovative society is inextricably linked to a model of society in the mold of democracy, but the evidence to support such a thesis is scarce. It is more likely that other sociological, economic or psychological factors facilitate or block the transformation of inventions into production for consumption. One of them could be the dissemination of new knowledge in society. Another is decision making in research and development. A third, and perhaps the most important, concerns the way in which the economic system selects the financing of inventions and investment projects. But none of these are rooted in democracy.

The United States has implemented solutions by directly and indirectly limiting China’s overseas purchases of technology and shutting down export markets for its high-tech products. Increasing returns to scale allowing funds to flow back into research and development cannot flourish without large markets. So the United States is trying to box in China. Huawei is another example.

Such a policy may turn out to be ill-conceived and short-sighted. This could make China more determined to triumph. For now, China is focusing on emerging markets and developing economies, as evidenced by the 2015 launch of the Digital Silk Road. With future population and economic growth, this is where the large and vibrant markets lie. China has adopted an offensive and proactive policy designed to solve its own problems, with the United States locking itself into a defensive and reactive role.

The United States might find it difficult to force its allies to follow the line. A strategy similar to the American plan was used over two hundred years ago when Napoleon Bonaparte introduced the continental blockade closing European ports to British goods. It failed. Mainly because Napoleon’s satellites and allies reluctantly came, participated under pressure, and implemented it half-heartedly. To make it effective and bring Britain to its knees, Napoleon alienated his allies, some of whom had secretly negotiated with Britain. Russian dissent undermined the blockade and became one of the reasons for its attack in 1812. This military enterprise contributed to its downfall.

One wonders if something similar is in store for the United States. Various Asian and European allies are suspicious of China’s policies and behavior. They may be ready to protect their own technical knowledge and prevent China from becoming too dominant a factor in communication and a few other sectors, but they may not be ready to go as far as the United States. . If Americans behave awkwardly, and there are examples of this in the past, then Allied candor may become less enthusiastic.

The deciding factors that determine whether China will do the trick are not US countermeasures, but:

  • Can innovation and entrepreneurship merge into a growth machine – an achievement unheard of in its four-thousand-year history. Is the infrastructure to accelerate this grueling task massive, stupendous, and does it encroach on almost every nerve in society?
  • Can China find the holy grail of sustained growth with a declining population, something no country has ever done before?
  • Can the country remain united under the leadership of the CCP?

No one knows the outcome of this colossal economic and social engineering, but the world must hold its breath and wish for success. Otherwise, a China trapped in low growth with a population accustomed to higher living standards year after year may well herald a global economic depression of unprecedented magnitude. In fact, China could become a recalcitrant partner in the global system blaming the West for its misery, which is not exactly conducive to a peaceful world.

Joergen Oerstroem Moeller is the author of Asia’s Transformation: From Economic Globalization to Regionalization, ISEAS, Singapore 2019 and The Veil of Circumstance: Technology, Values, Dehumanization and the Future of Economics and Politics, ISEAS, Singapore, 2016.

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