British
Prime Minister David Cameron (L) shakes hands with Chinese President Xi
Jinping following the Xi's speech at the UK-China Business Summit in
Mansion House, central London, on October 21, 2015. Photograph by Leon Neal — AFP/Getty Images
The
UK has rolled out the red carpet for Chinese president Xi Jinping on
his five-day official visit. He is being given the royal treatment ,
including a stay at Buckingham Palace, a ride in a state carriage along
The Mall and several banquets. The trip will also include plenty of time
with the British prime minister, David Cameron, who is keen to discuss
the trade and investment that the UK hopes to secure from the visit.
Britain’s
pivot to China is largely based on its economic strength. And yet there
is cause for concern. Having been the locomotive for global growth
following the financial crisis in 2008, Chinese growth has now slowed
and its economy is looking increasingly fragile. The latest GDP figures
came in at just under 7% , significantly down from the astounding
annual rate of more than 9% per year between 1990 and 2010.
Exports
from China have declined, and exports to China must battle against the
depreciating yuan . China’s slowdown has depressed global commodity
prices, adversely affecting big exporting countries such as Brazil and
Russia.
Some leading economists have been very optimistic about China. Nobel Laureate Robert Fogel published an article in 2010
that predicted that China’s GDP will grow at an average annual rate of
more than 8% until 2040, when its GDP per capita would be twice that
projected for Europe and similar to that in the United States. Fogel
used a textbook method of analysis to predict an unrelenting upward
path.
But
as countries grow, their service sectors tend to increase as a
proportion of output and employment. Rates of growth of productivity in
services tend to be much lower than in manufacturing or agriculture.
Hence, in any economy, growth rates are likely to slow down through
changes in economic structure . There are several other reasons why
China’s economic growth is set to stall.
1. Demographic shifts
China will experience an adverse demographic shift
in the coming decades. Three decades of the one-child policy has
reduced the number of adults of working age. The recent and ongoing
relaxation of that policy, plus a big decline in infant mortality,
increases the number of children. Older people are living longer, due to
improved healthcare and reduced poverty. Hence the average number of
children and old people, which needs to be supported by each person in
work, is set to increase dramatically.
2. Chinese GDP per capita is still low
GDP is way below that of the U.S. and other developed countries. World Bank Figures
for 2014 put China’s GDP per capita at about 24% of that in the U.S. In
the 20th century, only five countries managed to grow from 24% or less
of U.S. GDP per capita to 60% or more of U.S. GDP per capita. They were
Japan, Taiwan, South Korea, Singapore and Hong Kong. China still has a
long way to go.
3. Lack of democracy
While
there is some evidence that autocratic governments can help economic
development at lower stages of development, particularly by promoting
basic industry and infrastructure, there is strong evidence
that democratic institutions are much more suited to higher levels of
development. Notably, when Japan, Taiwan and South Korea reached about
45% of U.S. GDP per capita, they were established or emerging
democracies. A transition to a more democratic government may be
necessary as China develops, but this would be very difficult to achieve
— and could be highly disruptive.
4. Lack of openness
A
democratic government is but one part of a constellation of vital
institutions. As Nobel Laureate Douglass North and his colleagues have argued,
dynamic modern economies need checks, balances and countervailing power
to minimize arbitrary confiscation by the state. Legal systems have to
develop significant autonomy from the political elite. In my book Conceptualizing Capitalism,
I show that absolute GDP per capita in a sample of 97 countries is
strongly correlated with absence of corruption and openness of
government. China is not an outlier in this test.
5. Problems with land and property rights
China’s
population is divided into two classes. Chinese citizens are registered
with either an urban or rural classification, depending on where they
are born. Urban registrants have better education and health services.
Many
rural registrants, meanwhile, have rights to the use of land. But these
are often anulled after local party officials are bribed by business
speculators and sell the land for profit. Frequent local protests result
and the whole system of land use is in dire need of radical reform.
Currently it fosters corruption and inhibits the skill development of
half of the Chinese population .
6. Lack of homegrown talent
Although there are many small firms in China, there are still few mainland-registered large firms. Barry Naughton has noted
that of the top 10 firms in China exporting high-tech products, nine
were foreign. Offshore registration is understandable, because fear of
state sequestration persists in a country that did not recognize private
property rights in its constitution until 2007. China’s financial system is very heavily concentrated in state hands, with punitive penalties on private lending.
Thus,
there are weighty institutional and demographic drags on further rapid
growth in China, especially as it enters intermediate levels of economic
development that are ill-suited to the continuance of a one-party
state. China can succeed, but only through massive and potentially
destabilizing reform of its political and economic institutions. We
should not be surprised by even lower growth rates in the future.
Geoffrey M. Hodgson is a research professor at the University of Hertfordshire. This article originally appeared on The Conversation.
No comments:
Post a Comment