In his bombshell of a projection that China will produce $123 trillion in economic output by 2040, Robert Fogel conveniently dismisses any number of problems that threaten China's economic development, from environmental degradation to stalled political and economic reforms, by arguing that "Beijing has proven quite adept in tackling problems it has set out to address."
Past success is no guarantee of future results, and Fogel sets his entire analysis -- which implies an average annual growth rate of about 10.8 percent a year for more than 30 years -- on that shaky assumption, entirely overestimating the Chinese government's omniscience and its ability to overcome the country's enormous political, economic, and environmental challenges.
These problems on almost every level will prove far more threatening than Fogel suggests. First, the financial crisis has stalled the process of economic liberalization in China and strengthened the state's role in market outcomes. Over time, this will certainly create a range of inefficiencies that hinder future growth. Beijing's stimulus response -- originally deployed last year to compensate for the fallout in global demand for Chinese exports -- will probably have permanent repercussions. Already, industry revitalization and consolidation programs, coupled with a massive influx of easy credit, are stifling the private sector (aside from real estate, which could present its own downside growth risk) and encouraging production overcapacities in state-controlled, export-intensive, heavy industries like steel and cement. The Chinese renminbi's steadfast dollar peg since mid-2008 is giving even more incentive for export firms to over produce, which will inevitably perpetuate a reliance for growth on exports to consumers in America, Europe, and Japan -- with all the risks that come with that dependency.
The leadership now looks less willing than it has in decades to abandon its economic control. Beijing won't soon forget that China's restricted system allowed the government to quickly mobilize fiscal and credit resources to rescue growth and prevent social instability in the face of serious economic crisis. Meanwhile, the more liberalized U.S. economy, once a model for China, remains burdened with surging debt and double-digit unemployment. The free market has lost a bit of its luster.
This heavier reliance on a state-led approach will doubly skew China's growth potential by dampening innovation and reducing the returns expected on sizable education investments. It will be enormously difficult for China to move beyond manufacturing to become an innovator without genuine reform of a political and economic system that stifles individual expression and creativity and directs massive human and financial resources toward less-innovative, state-owned firms. Fogel's expectations for education's growth contribution, based on education and productivity data in the United States, may not fully transmit to China. After all, China's top college graduates are actively seeking jobs in either government or state-owned firms, for higher salaries and job security. That's good for the bureaucracy, but not so good for innovation and entrepreneurialism.
Fogel warns that Europe faces some serious demographic challenges. True enough, but as Fogel only briefly acknowledges, China has an aging population of its own to reckon with. Chinese statistics show that the country's birthrate fell 42 percent from 1990 to 2007, and government projections suggest that by 2025, nearly a quarter of China's population will have celebrated its 60th birthday. Not surprisingly, Beijing is already considering ways to strengthen the country's inadequate social safety net, but this process carries its own policy risks and the country's fragmented pension system won't be fixed so easily. Local governments that operate their own social security funds will resist a push to centralize the effort, and the amount of capital needed from the central government to make benefits meaningful will meet fierce resistance from deficit hawks within China's Finance Ministry. If the leadership falls short in caring for the elderly (efforts to date have certainly been inadequate) this population will present a much larger than expected drag on economic growth.
But the most important reason why we won't see 1.4 billion Chinese earning an average of $85,000 per year is simply that the Earth can't sustain such rapid growth. Today, just 4 percent of China's people own their own automobile. Now multiply that number by 20 and imagine the environmental stresses China would have to manage as a result of such an increase -- not to mention the impact of price spikes for the traditional resources that will remain principal components in the energy mix for at least the next 20 years. Fogel's forecast seriously underestimates these problems.
The biggest environmental challenge for China's leadership will be in securing enough water to keep the economy afloat. Fogel predicts that the agricultural sector, China's heaviest water consumer by far, will remain an "underappreciated economic engine" for growth. But Beijing already faces water scarcity, and industrial growth plus urbanization will mean increasing demand on China's already-inadequate water resources. The Water Resources Group, coordinated by McKinsey & Company, recently forecast that without significant policy changes, China will face a 25 percent supply gap for expected water demand by 2030. This is an expectation of what will happen, not an outside possibility.
Beijing's capacity to cope with the complex issues tied to continued growth is anything but assured. It will face insurmountable difficulties, for example, in forcing local-level bureaucracies and companies to adhere to central-level environmental and economic policies. History suggests a far more pessimistic outlook: Despite the 20 years that have passed since Beijing mandated that local governments incorporate water environmental protection into their production and construction plans, and the numerous iterations of that policy since, China's Ministry of Environmental Protection's own data clearly shows a more than 34 percent increase in wastewater emission from 2000 to 2007 alone (a primary driver of water pollution). Nearly two-thirds of the population now believes that water pollution is China's most pressing environmental threat.
Is the world ready for the China that Fogel describes? A better question: Is China?
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