Martin Wolf considers China’s prospects for the future in a piece at the Financial Times:
Future demand will depend on the emergence of a mass-consumer market, while growth of supply will require an upsurge in growth of “total factor productivity†— a measure of innovation. Yet, in 2017, private consumption was only 39 per cent of GDP. If it is to drive demand, the savings rate must tumble and the share of household incomes in GDP must jump. Neither will be easy to achieve. But the biggest hurdle of all, especially to the needed upsurge in productivity growth, is the shift towards a more autocratic political system.
For one and a half decades, China has benefited from the reforms introduced by Zhu Rongji, premier from 1998 to 2003. No comparable reforms have happened since his time. Today, credit is still being preferentially allocated to state businesses, while state influence over large private businesses is growing. All this is likely to distort the allocation of resources and slow the rate of innovation and economic progress, even if an outright financial crisis is avoided.
In sum, China may well fail to replicate the success of other east Asian high-growth economies, in becoming a high-income country in short order. It will surely be far harder for it to do so, because the distortions in its economy are so large and the global environment is going to be so much more hostile.
None of these are novel observations. Indeed, I and others much more prestigious than I have been pointing these things out for 15 years. Fifteen years ago I pointed out that China had some grave challenges to meet in the years ahead, among them demographics, the environment, and their corrupt, inefficient banking system. None of those changes have been addressed.
Will China continue to outperform its critics’ expectations? The answer may well depend on the preferences of the Chinese. Will the instinct to concentrate power in a few hands serve it well?
I’ve been skeptical of the “Thucydides Trap” scenario but the U. S. isn’t the only candidate for the role of “established power” while China isn’t the only candidate for “rising power”. Are demographics destiny and which direction do they point?
