It comes as no surprise that the past four decades have been China’s golden years; where the world witnessed one of the greatest economic wonders as the country’s economy continues to expand at an average rate of 9.5% for over four decades. China’s GDP(Growth Domestic Product) rose from 58 billion USD in 1978 to 13 trillion USD in 2017, while the per-capita GDP rose in 3.58 fold growth to 9,378 USD and transformed from the world’s lowest-income to middle-income country. China also did a remarkable job in getting more than 700 million people out of poverty, which made its middle class larger than any emerging economy. The major factors that drive China’s remarkable growth are massive government spending in the light manufacturing industries,export-led industrialization policy which is accompanied by the excess supply of rural workers. Today, China is the world’s largest manufacturing hub and produces more than 50% of the major Industrial goods. With the presence of a strict authoritarian government and extractive institution, this remarkable and consistent economic advancement is unthinkable, but the old aged question remains: Will China sustain its rapid economic growth? This paper argues that despite the phenomenal economic growth and poverty reduction that the nation has gone through, in the years to come it’s inevitable that China will face an economic slowdown. Sustaining growth is almost impossible in the extractive economical and political institution and China’s one-party authoritarian system can be a threat to its long-term stability and economic growth. The paper will discuss the main Institutional and political factors that contribute to the economic slowdown.
Labour shortage In Manufacturing Industries
China’s recent industrial revolution traces back to 1987 when the People of the Republic of China made a major shift from an agrarian economy to low-cost export-oriented Industrialization. Among many, one of the major factors that drive China’s industrialization advancement is low baseline productivity with an excessive labor supply from rural regions. As a result, the urbanization rate has increased from 17.92% to 59.58% in 2018, which has been showing an increase by an average of more than one percentage point annually. As the china population ages, labor shortage started to be felt in light manufacturing and other labor-intensive industries.
Recent demographic data reveals that China’s working-age population (people aged 15 to 64) is significantly decreasing, with a dramatic fall of 9% from 2015 to 2035 and 20 % in 2050; which is a loss of 200 million people. According to the United Nations, China may have as much as 44 per cent of its population retired by 2050. As the working-age population declines it is impossible to achieve the productivity gains necessary to maintain growth. This sharp decline in China’s working-age population is likely to be accompanied by a huge decrease in GDP in the absence of dramatic gains in labor productivity.
Political and Economic Institutional Factors
Strong Institutions play an important role in the nation’s economic prosperity and sustaining growth. In the early phase of development Incentivizing people to Innovate, invest and educate is crucial and Institutions play an important role in providing a framework for these incentives, providing opportunities, and levelling the playing ground. China can change to a market economy with the presence of an extractive institution with a heavy role from the communist party. Even Though the private sector has grown considerably, a major portion of the Chinese economy is still owned by state enterprises. Around 30% of the total assets(Manufacturing and Service Sector) are state-owned and this further may lead to corruption, inefficiency in production and service delivery, and lack of accountability and transparency.
The absence of political and economic institutions in a country, which enforce Intellectual property will eventually reduce investment and technology transfer in the long run. Due to China’s long bureaucracy and judicial protectionism, it’s almost impossible to register a property right. According to UNCTAD’s data, FDI flow in China has shown a significant decrease of 10% annually on average from 2002 to 2012. Multinational companies such as GoPro, Panasonic, Sony, Hasbro, Revlon, and L’Oreal have recently closed shop or significantly decreased their capital investment and future expansion plan in the country. This is partly due to the growing concerns about property rights, less conducive business environment, political pressure, and rising wages. Chinese enterprises overseas are seen as a safety threat, and western companies reconsider making a partnership with their Chinese business counterparts. This has a negative implication on the foreign technology transfer to China. Domestic enterprises with more than 50 employees are obliged to have a communist party representative on-site, this creates unnecessary bureaucracy, paralyzes the innovation and decision-making of a firm. Most companies preserve China’s technological advancement based on imitation and expropriation rather than creation and innovation requires changes in organizational culture which has been lacking in China’s institutions.
Debt Crisis and Diplomacy
According to the Bank for International Settlement, China’s total credit reached 262.9% of its GDP at USD 37.2 trillion up from 178.8% at the end of 2010. The country’s debt reached $34 trillion-266% of GDP and is growing fast, corporate debt is also on the rise. This will potentially create financial instability in the country. Despite the fact, China continues to lend money to countries within the belt and road initiatives, to keep economical influence in the region.
As most political scholars suggest the coming years will be a rocky political journey for the Communist party, as there’ll be a growing demand from the younger generation requiring a democratic institution and political instabilities in the region, such as the Hong Kong and Tibet requiring autonomy. The Chinese Government will put a lot of financial resources into stabilizing the situation which will weaken the economy and dial down the growth momentum.
Final Word- In their Classic Why Nations Fail Book Author Robinson and Acemoglu narrate how extractive institutions and authoritarian regimes lead the Soviet Union to the Economic collapse and make a point that the same will happen in China as there are no inclusive Institutions that’ll sustain its growth. I have shared a similar opinion in this regard, having inclusive political and economical institutions play an important role in sustaining the economic growth and advancement of the country. China can’t sustain its rapid economic growth due to the lack of these institutions, but unlike the Soviet Union economic collapse, I believe China continues to play an important role in the global economy and be among the leading industrialized nations.
Lidiya Kassahun , Masters in Development Practice student, UC Berkeley
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