China is assumed by many destined to overtake the US as the world's leading power. But history shows the dangers of extrapolating from today's growth numbers.
According to the US National Intelligence Council (NIC), ‘China is poised to have more impact on the world over the next 20 years than any other country.’ China is already the world’s second largest economy, second largest energy importer, largest natural resource importer by volume, and largest emitter of greenhouse gasses. Indeed, following the S&P downgrading of the US credit rating to AA+, Beijing feels empowered to declare that it ‘has every right now to demand the United States to address its structural debt problems.’
However, despite its astute policy navigation, efforts to guide national development, and claims of exceptionalism, China isn’t immune to larger patterns of economics and history. And those patterns tell us that China faces costly internal and external challenges that will hinder its ability to avoid the S-Curve-shaped growth slowdown that so many previous great powers have experienced, and that so many observers believe the United States is undergoing today.
Where China is headed domestically and internationally has major implications across the board for virtually everyone on this planet. The country has risen at a rate beyond even its leaders’ expectations over the past three decades, and a power shift is afoot in the international system. The fully unipolar system that persisted from 1989 to roughly 2008 is no more. To many, this signals a clear power transition in which China is poised to overtake the United States as the world’s foremost power. Estimates emerge constantly as to when China’s economy will become larger than that of the United States, and it’s assumed that China’s diplomatic, information, and military aspects of national power will grow in proportion.
But many policymakers and economists question whether China’s current growth trajectory can be maintained in the face of clear structural challenges that include pollution, corruption, chronic diseases, water shortages, growing internal security spending, and an aging population—all factors that feed off of one another and exact increasingly large costs for the Chinese state and economy.
One prominent Beijing-based economist, for example, believes that the country’s growth will need to slow to 3 percent to 4 percent per year—less than half the current rate—if it is to sort out structural imbalances in its economy. That’s a rate that the United States, Japan, and many European countries would envy, but the global implications are very different from a 7 percent to 8 percent annual growth regime.
The S-Curve concept is a useful tool for describing how great powers rise and decline. Because of an historical tendency for national efficiency to decrease as society ages, states tend to decline and thereby cause a downward spiral of increasing consumption and decreasing investment that undermines the economic, military, and political underpinnings of a state’s international position.
A society or country experiences slow growth in the early years, then enjoys more rapid growth as more resources flow into the state treasury, infrastructure develops, and the birth rate falls. The process continues until the state reaches its maximum growth rate, at which point various countervailing forces begin to constrain expansion and set the economy onto a slower growth path or even a state of equilibrium. Domestically, social spending and partisan behaviour may threaten productive investment and economic growth. Internationally, a hegemon tends to ‘overpay’ for influence in the international system because of the tendency for allies to ‘free ride,’ and technological diffusion can undermine a hegemon’s economic and technological leadership. But differences in national system and circumstances may have profound implications for the creation and maintenance of national power.
Many argue that it is precisely S-Curve-like factors such as explosive growth in healthcare and pension costs and military/overseas commitments that threaten American prosperity and pre-eminence. But few have considered the possibility that similar factors could constrain China—and perhaps much sooner than commonly anticipated. In its early years of modernization, China exploited a ‘demographic dividend,’ namely low labour costs and initial infrastructure investment, to grow rapidly. But the country is now beginning to assume social welfare and international burdens that will likely slow growth progressively, and may even check China’s rise in the international system as its leaders are forced to make much more difficult sets of ‘guns vs. butter’ decisions.
Managing China’s challenges will require major shifts in the country’s economic, and perhaps, political structure. This may substantially constrain its potential economic growth and, proportionately, its ability to invest in education, innovation, the military and other factors that help determine a country’s comprehensive national power.
Photo Credit: Flickr / Tyler
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Milo Jones
A moderately detailed case for why China may already have peaked is made here: http://silberzahnjones.com/2011/05/04/has-china-peaked-forecasting-using-neustadt-may-framework/
Frank
I do not think that Chinese people should be upset about this article. China has many problems. We have these people doing free research for us to point out all the problems we have or might have. So we can correct these problems if they are real. If they are not real, we can just smile about the author’s ignorance. There is no need to help the western authors to get better with their research or knowledge about China.
Nobody is interested in doing this type of researches to India. Why ?
Because China is a relevant country.
Rupesh Shukla
To Proud Frank,
Yeah….China’s association with US in opposing erstwhile USSR helped China gain technology and investments from US and Europe. India was with USSR then(Sadly)hence lagged behind economically.
India only started looking west and at US in 1991 i.e. post USSR collapse hence China had a lead of over a decade on India with economic reforms, liberalization and favorable western countries support in regards to technology that China has partly been successful in copying and in becoming factory to the world.
India is lagging behind China but is fast catching-up…Just think in 1991 when China was already making an impact on the world and taking giant strides, India went bankrupt…but since then India has taken the right direction and not in a distant future just like you most chinese shall realise that.
By the way…you are very naive as China is spending the best part of their resource doing studies on India and giving free bounties to Pakistan))))
All the best my friend….and even you KNOW World is beware of China and China is beware of INDIA.
Voz
Exactly, you have the point. China is undeniably the luckiest country in the world with so much attention and concern about every single step China takes. Even in the noisy cloud of criticism and condemnation, they actually provide a mirroring effect on China’s problem which no other country enjoys.
China
China is a great country with enormous potential.
But I would wish the western media would stop over exaggerating their progress and putting superficial expectations on the country.
It hurts China.
Drive by
The authors give us a laundry list of the problems that China is supposed to face. Few are specific to China. The authors obviously do not realize that cleaning up pollutions, implementing environment protection measures, devoting more manpower and resources to health care, insurance and pension plans all increase employment and GDP growth, instead of reducing it, unless of cause if you increase investment in these by borrowing money/issuing new debts, like the U.S. does.
While it is indeed dangerous to extrapolate past data, the reality is that the Chinese growth in the past 30 years has no historical precedent, anywhere in the world. Even the infrastructure building boom will not finish anytime soon. It probably will take another 20 years for China to build a “bridge to nowhere”, like Japan did.
Crispus
As one who was actually doing time series analysis, forecasting, and predicting the future for Japanese companies, and in opposition to them, in the 1980′s I am struck by the similarities between the Japan of those days and the China of today.
Not only do I see trends and curves in data, and the resultant extrapolations there from, remarkably consistent, I read the words that portend the inevitable world dominance of then Japan, and today, China.
I bought into the rise of Japan. But after working with intelligent Japanese management and engineers, I grew tired of the arrogance. None of these guys had experienced a significant downturn (there was one when Japan tried to maintain yen parity after yen revaluation until it became clear export demand had some price elasticity). America is finished, Americans cannot do the simplest tasks, history is Japan’s. There was even an English article, published in Japan, proclaiming Japan would finally win the war!
In 1984, I visited China. I looked, learned and enrolled in a Mandarin class at UCLA as soon as I could. I was impressed by the potential of China.
After working, teaching, doing business and, for many years, living in China I have noticed the same nihon-centric attitudes morphed in to han-centric attitudes. We are different, no one has done this before, this is historic, we can not fail, America (hehe) is finished!
China, more so than Japan, has structural problems, a lack of transparency, is developing, and striving to maintain, a huge disparity between its have and have not classes, and has a population less docile and prone to action when it perceives injustices. These coupled with inevitable business cycle effects spell difficulties ahead for maintenance of growth, social stability and perhaps world peace.
China’s leaders seem to have a reverse xenophobia. They look to the rest of the world as the answer while not trusting their own people. A dominant feature of China’s rise is forced modernization and a scraping of the “olds.” China proclaims a 5,000 year culture but works hard to destroy or “disneyland” it. Somehow, as urbanization is a measure of progress, rural dwellers are pushed into urban areas and immediately become an underclass without the requisite documentation forced to work for lower wages without healthcare or education for their children.
My feeling is the Chinese S-curve is a given and that what follows will be another sad entry into the long history of China.
Ben
Interesting insight, thank you for sharing.
John
Finally, a realist.
Yes. I grew up in that generation too. Japan could do no wrong, thier economics were strong. We should sell everything we had, bow down before thier economic might, etc.
Now, the silence is deafening. Oh, its China now.
The same music that others say we need to dance to.
I am sorry, but if China is truly unique, then they would put thier money where thier mouth is and maybe learn a thing or two.
If China is a economic pacifist then act like it. If they are a global economic power with benefits for the world then act like it.
I am sorry, but fool me once, shame on me. Fool me twice, shame on you.
Joe
I thought Crispus made some very good points. Like him, I lived in Japan during its rise in the 1980′s. I remember struggling to earn a living in Tokyo to pay for my education costs in Japan, but being surrounded by so much conspicuous consumption heavily flavoured with arrogant nationalism. I remember a phrase in Japanese from the time where the US dollar was described as “play-money”. The year before I left, a favourite bar drink was sake which had gold flakes in it. Real gold flakes to end up in a toilet. How could people be so confidant about the “permanence” of wealth. I’m now coming to the end of severasl years living in 1 Chinese city so can make comments about changes over time I witnessed.
Suddennly last year I realised I had seen it all before in the Japan of the 1980′s – it is all there. I was experiencing deja vu – conspicuous consumption on things like jewellery, clothing, house furnishings. The sudden rise of car-ownership in a very selfish way with everyone wanting an enormous range-rover completely unsuitable for modern city commuting and shopping, and with the highest of petrol consumption for motor vehicles. Then the arrival of juvenile, arrogant nationalism encouraged by the government. How sick I am of the phrase “but we are only a developing country and you are a rich white foreigner” as an excuse for all kinds of innefficiency. Older people are at a disadvantage in the Chinese job market, but like Crispus they have something which can not be bought but only experienced – we have seen it before, and can only wonder why people, and even countries want to repeat the mistakes of the past but with a different brand-name.
Pa Deuce
In the 1980s, this article could have been, and was, written about Japan many times over. Japan was so efficient, Japan was so dynamic, Japan was going to be the leading power in the world, if not in the universe. But Japan was in an economic bubble, and the bubble popped, as all economic bubbles do, and Japan has not recovered from that day to this, twenty years on.
China is in an economic bubble, but China has many more problems than Japan ever had, some of which are listed in the fourth paragraph in the article. The entire strength of China is utterly dependent on foreign markets, and those markets are shutting down, since Obama began to deliberately reduce American power and position in the world and the neo-Marxist EU is nearing economic collapse.
Fortunately, Obama is a transitory phenomenon as well as a walking, talking bad idea, and the USA will recover when the American people realize that the third largest economic bubble in history (dot.com, increased our national debt by $3 trillion) was the product of Bill Clinton, and the largest economic bubble in history (housing, increased our national debt by $5+ trillion and counting)) was the product of Democrats in general and Obama in particular. China is no cause for concern, the concern is elitists who try to run things and invariably screw everything up.
LeonO
It’s all the Democrats fault, is it? I guess George W. Bush’s wars in the Middle East and tax cuts for the rich had absolutely nothing to do with the deficit increase.
nichevo
Correct, since the broad-based tax cuts raised revenues, which is the whole point of taxes – right? Not punishing people but getting money? – they did not harm the budget.
As for the wars, well, at least some of it was unavoidable, and even in all, a trillion dollars over ten years is a little different from $4T over 2 years lke Obama had laid on us. Frankly Bush’s domestic laxity – i.e. letting the Dems have what they wanted, even throwing in on stuff like Medicare Part D, for which he gets any blame and never any credit – was far worse in re spending.
So, thanks for playing!