China's Economic Future Foretold – In Praise of China
2003 China GDP per capita (PPP) is $4,000. Assume 5% differential between PRC and developed-world GDP growth rates (e.g. 7% vs 2%), or a doubling time of about 14 years. This is consistent with sustained performance of Japan, Taiwan or Korea during similar periods in their development. (Current growth rate differentials are larger – as much as 7% – so our estimate is not aggressive.) To catch up with developed nations in GDP per capita (e.g., Korea, Greece or Portugal, currently at $16-18K per year) would require 30 years. (A more aggressive 6% growth differential would imply 24 years.)
Now assume income inequality similar to that of the US: 80th percentile family income is twice average income (this is conservative as actual income inequality in China is likely to be more uneven). Then, in 14 years there will be a "middle class" in China of 300M people whose household income is at developed country levels. In 20 years this middle class will easily be larger in population than either the US or EU. Note that while we refer to this as a middle class it actually comprises the richest 20-25% of the Chinese population. [Validation? China's middle class overtakes US as largest in the world. World's second largest economy has seen its middle class grow to 109 million. The Telegraph (UK)].
In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a superrich country in 2040. Although it will not have overtaken the United States in per capita wealth, according to my forecasts, 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. This is what economic hegemony will look like.
Most accounts of China’s economic ascent offer little but vague or threatening generalities, and they usually grossly underestimate the extent of the rise — and how fast it’s coming. (For instance, a recent study by the Carnegie Endowment for International Peace predicts that by 2050, China’seconomy will be just 20 percent larger than that of the United States.) Such accounts fail to fully credit the forces at work behind China’s recent successor understand how those trends will shape the future. Even China’s own economic data in some ways actually underestimate economic outputs.
It’s the same story with the relative decline of a Europe plagued by falling fertility as its era of global economic clout finally ends. Here, too, the trajectory will be more sudden and stark than most reporting suggests. Europe’s low birthrate and its muted consumerism mean its contribution to global GDP will tumble to a quarter of its current share within 30 years. At that point, the economy of the 15 earliest EU countries combined will be an eighth the size of China’s.
This is what the future will look like in a generation. It’s coming sooner than we think.
What, precisely, does China have going so right for it?
The first essential factor that is often overlooked: the enormous investment China is making in education. More educated workers are much more productive workers. (As I have reported elsewhere, U.S. data indicate that college-educated workers are three times as productive, and a high school graduate is 1.8 times as productive, as a worker with less than a ninth-grade education.) In China, high school and college enrollments are rising steeply due to significant state investment. In 1998, then-President Jiang Zemin called for a massive increase in enrollment in higher education. At the time, just 3.4 million students were enrolled in China’s colleges and universities. The response was swift: Over the next four years, enrollment in higher education increased 165 percent, and the number of Chinese studying abroad rose 152 percent. Between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent. I forecast that China will be able to increase its high school enrollment rate to the neighborhood of 100 percent and the college rate to about 50 percent over the next generation, which would by itself add more than 6 percentage points to the country’s annual economic growth rate. These targets for higher education are not out of reach. It should be remembered that several Western European countries saw college enrollment rates climb from about 25 to 50 percent in just the last two decades of the 20th century.
And it’s not just individual workers whose productivityjumps significantly as a result of more education; it’s true of firms as well,according to work by economist Edwin Mansfield. In a remarkable 1971 study,Mansfield found that the presidents of companies that have been early adoptersof complex new technologies were on average younger and better educated thanheads of firms that were slower to innovate.
The second thing many underestimate when making projectionsfor China’s economy is the continued role of the rural sector. When we imaginethe future, we tend to picture Shanghai high-rises and Guangdong factories, butchanges afoot in the Chinese countryside have made it an underappreciatedeconomic engine. In analyzing economic growth, it is useful to divide aneconomy into three sectors: agriculture, services, and industry. Over thequarter-century between 1978 and 2003, the growth of labor productivity in Chinahas been high in each of these sectors, averaging about 6 percent annually. Thelevel of output per worker has been much higher in industry and services, andthose sectors have received the most analysis and attention. (I estimate thatChina’s rapid urbanization, which shifts workers to industry and services,added 3 percentage points to the annual national growth rate.) However,productivity is increasing even for those who remain in rural areas. In 2009,about 55 percent of China’s population, or 700 million people, still lived inthe countryside. That large rural sector is responsible for about a third ofChinese economic growth today, and it will not disappear in the next 30 years.
Third, though it’s a common refrain that Chinese data areflawed or deliberately inflated in key ways, Chinese statisticians may well beunderestimating economic progress. This is especially true in the servicesector because small firms often don’t report their numbers to the governmentand officials often fail to adequately account for improvements in the qualityof output. In the United States as well as China, official estimates of GDPbadly underestimate national growth if they do not take into accountimprovements in services such as education and health care. (Most greatadvances in these areas aren’t fully counted in GDP because the values of thesesectors are measured by inputs instead of by output. An hour of a doctor’s timeis considered no more valuable today than an hour of a doctor’s time was beforethe age of antibiotics and modern surgery.) Other countries have a similarnational accounting problem, but the rapid growth of China’s service sectormakes the underestimation more pronounced.
Fourth, and most surprising to some, the Chinese politicalsystem is likely not what you think. Although outside observers often assumethat Beijing is always at the helm, most economic reforms, including the mostsuccessful ones, have been locally driven and overseen. And though China mostcertainly is not an open democracy, there’s more criticism and debate in upperechelons of policymaking than many realize. Unchecked mandates can of courselead to disaster, but there’s a reason Beijing has avoided any repeats of theGreat Leap Forward in recent years.
For instance, there is an annual meeting of Chineseeconomists called the Chinese Economists Society. I have participated in manyof them. There are people in attendance who are very critical of the Chinesegovernment — and very openly so. Of course, they are not going to say "down withHu Jintao," but they may point out that the latest decision by the financeministry is flawed or raise concerns about a proposed adjustment to the pricesof electricity and coal, or call attention to issues of equity. They might evenpublish a critical letter in a Beijing newspaper. Then the Chinese financeminister might actually call them up and say: "Will you get some of your peopletogether? We would like to have some of our people meet with you and find outmore about what you are thinking." Many people don’t realize suchback-and-forth occurs in Beijing. In this sense, Chinese economic planning hasbecome much more responsive and open to new ideas than it was in the past.
Finally, people don’t give enough credit to China’slong-repressed consumerist tendencies. In many ways, China is the mostcapitalist country in the world right now. In the big Chinese cities, livingstandards and per capita income are at the level of countries the World Bankwould deem "high middle income," already higher, for example, than that of theCzech Republic. In those cities there is already a high standard of living, andeven alongside the vaunted Chinese propensity for saving, a clear and growingaffinity for acquiring clothes, electronics, fast food, automobiles — all aglimpse into China’s future. Indeed, the government has made the judgment thatincreasing domestic consumption will be critical to China’s economy, and a hostof domestic policies now aim to increase Chinese consumers’ appetite foracquisitions.
And Europe? Europe, by which I mean the 15 earliest EUmembers, faces twin challenges of demography and culture, its economic futureburdened by a mix of reproductive habits and consumer restraint.
Europeans, of course, won’t be eating grass in 2040. Theireconomic decline over the next 30 years will be relative, not absolute, astechnological advances and other factors should allow Europe’s overall laborproductivity to continue to grow about 1.8 percent annually. Yet theirpercentage contribution to global GDP will tumble, shrinking by a factor offour, from 21 percent to 5 percent, in a generation.
Demography is the first key issue. The population of WesternEuropean countries has been aging rapidly, and that is likely to continue overthe next several decades. The basic reason: European couples aren’t producingenough babies. Europe’s total fertility rate has been below the level needed toreplace the population for about 34 years, according to a 2005 Rand Corp.study. As a result, the percentage of women of childbearing age will decline,in the earliest 15 EU countries, from about 50 percent in 2000 (it was alsoabout 50 percent in 1950) to the U.N. projection of about 35 percent in 2040.So we have a double whammy: Not only will reproductive-age women have sharplyreduced fertility rates, but the proportion of women who are in theirchildbearing years will also have declined sharply. By 2040, almost a third ofWestern Europe’s population may be over age 65.
Why are there fewer babies? One key reason is that Europeanattitudes toward sex have evolved sharply. One-hundred fifty years ago, it wasconsidered a sin to enjoy sex, the only legitimate purpose for which wasprocreation. But today, young women believe that sex is mainly a recreationalactivity. Behind the fertility trend is a vast cultural shift from thegeneration that fought in World War II, which married early and produced thegreat baby boom of 1945 to 1965. The easy availability of birth control and therise of sex as recreation mean that populations are likely to shrink in manyEuropean countries. As early as 2000, the natural rate of increase (birthsminus deaths) was already negative in Germany and Italy. By 2040, it is likelythat the natural increase will be negative in the five largest Europeancountries, except Britain.
So what if Europeans have a little fun now and then? Well,fun has consequences. Declining fertility pushes up the age of the citizenryand shrinks the percentage of people in the workforce, and so impedes growth.Demographic changes also shape the hiring and promotion structures ofindividual companies, and not necessarily for the better; if the elderly clingto the best jobs well past retirement age, younger workers may have to wait anextra decade, perhaps longer, to get their turn. And because younger workersare a major source of new ideas, slowing down the ascendancy of the nextgeneration may retard the pace of technological change. (If fertility ratesremain as low as they have been, Italy’s population will fall by half in 50years. Naturally, politicians are doing everything they can. They are joiningwith the Holy See and telling young women: Please procreate.)
In another way, Europe’s culture confounds economists.Citizens of Europe’s wealthy countries are not working longer hours to makehigher salaries and accumulate more goods. Rather, European culture continuesto prize long vacations, early retirements, and shorter work weeks overacquiring more stuff, at least in comparison to many other developed countries,such as the United States. In my observation, those living in most WesternEuropean countries appear to be more content than Americans with the kind ofcommodities they already have, for example, not aspiring to own more TVs perhousehold. Set aside whether that’s virtuous. A promenade in the Jardin duLuxembourg, as opposed to a trip to Walmart for a flat-screen TV, won’t helpthe European Union’s GDP growth.
Of course, China faces its own demographic nightmares, andskeptics point to many obstacles that could derail the Chinese bullet trainover the next 30 years: rising income inequality, potential social unrest,territorial disputes, fuel scarcity, water shortages, environmental pollution,and a still-rickety banking system. Although the critics have a point, theseconcerns are no secret to China’s leaders; in recent years, Beijing has provenquite adept in tackling problems it has set out to address. Moreover, historyseems to be moving in the right direction for China. The most tumultuous localdispute, over Taiwan’s sovereignty, now appears to be headed toward aresolution. And at home, the government’s increasing sensitivity to publicopinion, combined with improving living standards, has resulted in a level ofpopular confidence in the government that, in my opinion, makes major politicalinstability unlikely.
Could Europe surprise us by growing substantially more thanI have predicted? It seems farfetched, but it could happen, either by Europeanscurtailing vacations and siesta time to adopt a more workaholic ethos, or bymore young women and their partners aligning their views of sex more closelywith those of the pope than those of movie stars. Anything’s possible, butdon’t bet on it — Europeans seem to like their lifestyles just fine, and they’velong since given up their dreams of world domination. An unexpectedtechnological breakthrough could also shake things up, though this isn’t thesort of thing economists can base predictions on.
To the West, the notion of a world in which the center of globaleconomic gravity lies in Asia may seem unimaginable. But it wouldn’t be thefirst time. As China scholars, who take a long view of history, often pointout, China was the world’s largest economy for much of the last two millennia.(Chris Patten, the last British governor of Hong Kong, reckons China has beenthe globe’s top economy for 18 of the past 20 centuries.) While Europe wasfumbling in the Dark Ages and fighting disastrous religious wars, Chinacultivated the highest standards of living in the world. Today, the notion of arising China is, in Chinese eyes, merely a return to the status quo.
2012. Mapping China’s Middle Class McKinsey.
ALBERT KEIDEL. Senior Associate, Carnegie Endowment for International Peace
China’s economic performance clearly is no flash in the pan. Its growth this decade has averaged more than 10 percent a year and is still going strong in the first half of 2008. Because its success in recent decades has not been export-led but driven by domestic de- mand, its rapid growth can continue well into the twenty-first century, unfettered by world market limitations. Nor do other problems China faces jeopardize long-term growth prospects. China’s problems are in fact consistent with more developed countries’ challenges at earlier similar levels of economic moderniza- tion. China’s future success will undoubtedly also draw on its own thirty years of policy- making experience—for example, investing
in infrastructure, fighting inflation, shifting its labor force and opening to foreign trade and investment.
China’s likely continued success will even- tually bring an end to America’s global eco- nomic preeminence, requiring strategic reas- sessment by all major economies—especially the United States, the European Union, Japan, and even China itself.