Will China Be the Dominant World Power? A Con Argument

China watching has become a full-time job for pundits, both professional and amateur. It is a country exceptionally rich in potential and uncertainty. Possible futures vary from world domination to chaos and revolution. Some view China as the world’s inevitable economic powerhouse, while others see a country and an economy that is "unconditionally unstable." Foreign Affairs features two articles that argue China’s future from different perspectives. One, the more positive, sees China’s economic and political dominance as inevitable. The second, the less positive, sees China’s future as resembling that of any other developing country: problems will arise, growth will slow and the future will be uncertain. We will discuss this latter article here today.

Salvatore Babones provides a document titled The Middling Kingdom: The Hype and the Reality of China’s Rise. Babones argues that China’s accomplishments, spectacular as they have been, cannot be extrapolated into the far distant future, as some are wont to do. He sees China as being the beneficiary of some circumstances that cannot continue.

"China's dramatic rise over the past 20 years was propelled by two one-time bonuses: the population's declining fertility rate and its increasing urbanization. Both factors have led to massive increases in economic productivity, but they are finite processes and cannot be counted on in the future."

Babones claims that the declining birthrate, coupled with the one-child policy and parents who were dying at an early age, freed up both men and women to focus almost entirely on their working careers. Now, however, life expectancies are rising and a relatively large number of elderly will have to be cared for.

"Of all the generations of Chinese throughout history, this one is uniquely positioned to pursue work and create wealth. Future generations of Chinese workers will be smaller and will be saddled with the care of ever more elderly relatives. Moreover, fertility rates can only rise going forward, meaning that these workers may have more children to care for as well."

The need to care for more dependents, the children and elderly, will mean that workers will have to be diverted from the high-productivity-producing areas like manufacturing, to low-productivity-growth service sectors.

Urbanization provides a productivity boost by taking workers who are often unpaid subsistence farmers and placing them in paid employment. This is a process with natural limits.

"China's level of urbanization is still well below that of the West, and urban expansion in China shows no signs of slowing down. (At current growth rates, urbanization in China will not catch up to urbanization in the West or Latin America until the 2040s.) But what form will this expansion take? Huge shantytowns are already forming on the edges of Beijing, Shanghai, and other Chinese megacities. The Chinese government bulldozes shanties by the hundreds of thousands every year, but it is unclear whether their residents are being relocated or just being made homeless. Whether or not the government wins its war against slum development, the days when urbanization was a boost to economic growth are gone."

He sees China, at best, following a path similar to that followed by South Korea.

"....economic models tend to downplay the fact that as countries grow, growth gets harder. When economies move up global value chains, graduating from the production of simple manufactured goods to a reliance on the creativity of their citizens to develop new industries, they rise less and less rapidly. It took South Korea 30 years, from 1960 to 1990, to raise its GDP per capita from one-thirtieth of U.S. GDP per capita to one-third -- but then it took another 20 years to nudge its way up from one-third to one-half. And South Korea today is still a long way from catching up with the United States."

He sees a more likely comparison with Brazil, Mexico, and Russia.

"At its current growth rates, China will likely catch up to Brazil, Mexico, and Russia around the year 2020 in terms of per capita GDP. At that point, all four states will have per capita national income levels between $10,000 and $15,000 (in today's dollars). All will also have similar levels of economic inequality -- levels far higher than those in the developed countries. Their people will not experience serious hunger or malnutrition, but they will know mass squalor. About 40 percent of these countries' populations will live in large cities, and about 20 percent will live in rural areas, with the rest in small cities and towns. Their fertility rates will have fallen somewhat under replacement levels, and about two-thirds of their populations will be between the ages of 16 and 65. In the face of rapid aging, these countries will need to shift their economies away from growth industries and toward slow-growth health-care services."
"All of which raises this question: If in 2020, China will almost certainly face structural conditions nearly identical to those in Brazil, Mexico, and Russia, why should anyone expect it to grow any faster than them?"

Babones lists a number of structural issues that china must overcome if it is to continue growing at a rapid rate. He says the nation’s schools and companies have not yet demonstrated the innovation needed to compete with countries like the US. He mentions the severe environmental issues that China will have to face. It is still far from being able to guarantee a secure water supply for all its citizens, let alone a healthy one. China has created for itself a legacy of early death, sickness, and birth defects that will have to be reckoned with, and the causes eliminated. Doing business in China will get much more expensive. The aging of its society will also act as a brake on the economy.

"Since 1960, life expectancy in China has risen from 47 years to 74 years, but the number of children per family has declined from more than five to fewer than two. Today's little emperors will spend their most productive years taking care of their parents. And as they do, China's economic activity will have to move away from high-productivity manufacturing and toward low-productivity health services."

Finally, he compares the political and geographic position of the US in the world with that of China.

"But given the United States' far greater alliance network and geostrategic position, U.S. hegemony is not threatened by the rise of China. The United States is encircled by long-standing allies (Canada and the countries of western Europe) or stable but weak noncompetitors (Latin America). China's neighbors are a rich and powerful Japan, rising South Korea and Vietnam, giant India and Russia, and a host of failed or failing states in Central and Southeast Asia. The United States reigns supreme over the oceans, the skies, and outer space; China struggles to maintain order within its own territory. China will, and legitimately should, play an increasing role in Asian and world politics, but it is in no position to dominate even Asia, never mind the world."

Of the two views we have presented, that of Babones seems the best grounded in reality. He provided us with a number of interesting facts and insights that will be helpful in putting what we observe in our "China watching" into context.