Predicting the Future of China

The Economic PuzzleNicholas Lardy, senior fellow, Brookings Institution: China's record in generating growth and improvements in productivity, as opposed to simply accumulating capital, is not very impressive. It is difficult to foresee how, in the next 50 years, China can move to an economy where technological innovation--a knowledge-based economy--generates a large portion of its growth.
Fan Gang, director, National Economic Research Institute: If you look at the fast-growing countries of the past 50 years, they were all in one way or another run by authoritarian governments, Japan being an exception. But in the next 50 years democracies will have an edge. In the past, the best economic model was the fast and successful catch-up country. The emphasis was on assembly-type operations, labor discipline and low-end skills. It is quite possible in the next 50 years to have a dramatically different model.

Andy Xie, executive director, Morgan Stanley Dean Witter: The most important development in China's future will be the movement toward the rule of law. It's the foundation of a modern economy--in which people with ideas create wealth, not the people who have control over capital. This transition is not going to be an entirely smooth one. Too many people in China are still focused on capital-intensive industries.

Fan: Globalization, especially of the financial markets, implies that entrepreneurs don't have to rely on the local capital market. So the role of the government in managing finance to provide capital is diminished. And that's very good for small, innovative entrepreneurs. In Asia it's likely that we'll have two business models: the more traditional one that emphasizes basic skills and disciplines, and another that emphasizes innovation and ideas. It is likely that democracy fosters the new model and creates conditions for it to succeed better than authoritarian governments could. So the relationship between politics and economics is going to be quite different from what the world has known before.

Xie: If you look at ethnic Chinese in the region, you'll see they have a common set of characteristics. For example, they're very risk-taking, very entrepreneurial. On the other hand, they have not been able to create big, successful corporations. In the next 50 years, we'll see increasing use of information technology. So a higher level of organization will not be as important as before. This is what Bill Gates has been talking about: empowering individuals in small organizations. This works very much in favor of Chinese culture. If you're worried that somehow China has not created big successful corporations, in the long-term this trend might work out in China's favor.

Fan: There's something else starting to emerge that's very important. Recently we had a constitutional change that gave private ownership legal protection. More and more people realized the importance of the ownership issue, the property rights issue.

Huang: But there has to be a dynamic process. In the past, growth came from the fact that society was stable. In the future, returns will be coming from dynamic, mobile people and capital, and therefore there has to be some sort of legal system to accommodate that. The demand for a different type of political and legal system will increase relative to the demand for a stable and traditional system. I would associate growth with democracy and the rule of law. We ought to invest more in creating those types of political institutions that reward people for their innovativeness and energy.

Fan: Why weren't democracy and growth compatible before? Previously, growth was controlled by the government. The ownership was in the state, so there was no middle class, no private owners, no fundamental framework for democracy. Why couldn't China tolerate demonstrations before? Because if you had a demonstration on the street, the whole economy stopped. Not like in South Korea, where they can have student demonstrations every day but the economy keeps going. This is why I think private ownership is fundamental.

Huang: As long as you have growth, you can use the benefits of growth to pacify the losers. Instead of using a political authoritarian system to suppress dissent, what you do is manage growth and then use its benefits to pacify those left behind. That's how democracy solved that problem.

Heading to the City

Zhang Yunling, director, Chinese Academy of Social Sciences: I think you'll see continuous globalization and technological innovation in the future. China's economy will be based more on high-tech. However, since China is such a large country, vast areas will be relatively backward. In the next 50 years, 80% of the population will move to urban areas. They will not rely on agriculture for their livelihood. That's a fundamental change in society: 500 million people will move, changing their lives, changing culture, changing values.

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Fan: Yes, but the urbanization process itself will create jobs. The reason why is that in previous years rural industry was limited--it produced things, but it didn't produce many consumers. Urbanization means more public infrastructure, more housing. The urban service sector itself creates jobs.

Xie: But urbanization also can create an ecological disaster. So in China people have to pioneer something like a supercity. It will be something different from what the United States is experiencing. It's more like in Japan. Take Honshu Island--the whole island is really a city with 60 million to 70 million people. That is the sort of scale we're talking about.
Xie: The future of agriculture depends largely on genetic engineering and mechanization, so it's very possible that the yields could rise a lot. Look at the development of new varieties of corn. Corn crops in the U.S. have greater resistance to pests, and they are also less labor-intensive.

Fan: Labor is not the issue, because now the labor productivity of Chinese farms is very low. Many rural people are under-employed. Nominally, there are a lot of workers. Actually, they can be reduced by one-third to one-half without changing output.

Lardy: The real scarcity is land. The question is, how do you overcome that problem? Technological change is one possibility. But because of this land scarcity, I don't think China can follow patterns previously found in Europe and America's industrialized towns, which ate up a lot of land.

Xie: China just has to grow differently, because its population density is tremendously different from anybody else's. The challenge of urbanization is not that you can't keep people on the land but that you are going to have an ecological disaster when they move.

Hu Angang, professor, Qinghua University: During the 1990s natural disasters subtracted 3% to 5% from the GDP. Pollution now accounts for 3.5%. China's GDP is 57% of America's, but its consumption of water resources is nearly equal to America's. The question is how do we encourage new technology in solving these problems.

Zhang: Technology may mean that the environment issue, the problem of energy--all these important problems might be solved. Take the car industry. In the next 20 years, we may have a totally new car, with no pollution and lower energy consumption.

The Population Trap

Hu: In the next 50 years China will have to face three population peaks. First, by the year 2030 the total population will reach 1.6 billion. There are concerns as to how to feed this many people. The second peak will happen by 2020, when the working population--aged 15 to 64--will be 1 billion. That means we will have to create a lot of new jobs. The third peak involves the aging population--by 2040 the population above 60 will be about 320 million. This will make the social security system a big issue--how to take care of the aging population.

Zhang: Most worrisome is the social safety network. People who are 20 now will be 60 and ready to retire in 2040. During the 40 years in between, they will have to accumulate wealth for their retirement life. So it's urgent to start planning for them now.

Fan: That's a good point. The process of urbanization will go on for another 50 years. That means in 50 years, we have to make sure that new arrivals in the city will come into a social security network. But during this process, the social security system will be very sustainable. That's because even though we have an aging population, most of the newcomers to the labor force are young people. There will be more young people paying into the social security system than elderly taking money out. We'll have more young people to create savings.

Zhang: But they can't accumulate wealth fast enough. The Europeans started building a social security system very early in the industrialization process, and they're still having trouble. We haven't even started.

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Fan: I'm very optimistic about the next 50 years. The gap between China and the developed world will be narrower, both in terms of economic growth and in institutions. Chinese are very pragmatic. They will find solutions to the current crisis.

Huang: It's also possible that China will not have caught up with the West in 50 years, even though China is making good economic progress. But the per capita income gap could become larger. China could be closer to the West politically, but economically it could be more distant.
Huang: We tend to think about democratic political institutions as a result of economic growth. But political and legal institutions can also be important sources of economic growth. To generate growth you need an appropriate set of political and legal institutions first. Rather than thinking of these things as a result of economic growth, think of them as preconditions of growth. If that view is widespread, you may very well see China moving ahead a little bit faster than it has in the past 20 years on the legal and political front.

Zhang: Globalization presents another challenge. It is too massive, too quick. A country like China is still in transition from rural to industrialized, so it has to meet so many challenges suddenly.

Huang: True, but critics of globalization often look at labor displacement as a negative social impact. It's the opposite in developing countries, where it's the owners of capital who are hurt. Labor actually benefits from globalization. Capital moves to places where capital is scarce, and that creates jobs. In China, peasants gain because they produce things that we have a comparative advantage in. Let me come back to the rule of law. There are two ways to create it. One is that politicians believe in the rule of law as a good system and therefore implement it. But the more fundamental driver is globalization of the asset market. If you don't have rule of law, capital leaves. Capital earns low returns in countries that don't have good rule of law. Human capital also leaves, so if you don't have good intellectual-property-rights protection, then people with a lot of human capital will leave. That kind of driver is more important than the ideology of the politicians.

Fan: Let's just say it will be a bumpy road. More Chinese will integrate into the high-tech sector. America's Silicon Valley can be a partly Chinese territory; there are so many Chinese working there. That's part of globalization.

Military Power

Zhang: If the economy continues to speed up, China will develop militarily. But I don't think it will become a major power for two reasons. First, if it did, the society and economy probably would collapse. The experience of the Soviet Union shows that if you become a superpower by military but not economic means, you don't survive. Second, it's almost impossible for China to catch up. Why should we? As Deng Xiaoping said, China needs a long-term peaceful environment, to feed the people, to make a stable transition, to modernize. Economic development has replaced military strength, and a stable, cooperative relationship has replaced the ideological gap of the cold war. Still, there's been a great shift since the Kosovo crisis. Chinese are worried about future U.S. domination. It's clear that the U.S. will dominate the world in the next 50 years. If we fail to maintain a stable and peaceful relationship, China will have to use more resources to develop its military strength. I don't think China wants to dominate Asia, but its influence in the region will become bigger. If the U.S. can accept China's growing influence in the region and China can accept the continuing U.S. influence in the region, we'll find a common space where we can sit together. Otherwise, there will be confrontation.

Can the Center Hold?

Huang: Within China, the localities will gain more independence from the center politically. They have gained economic resources in the reform era. The movement toward more political autonomy, with local elections at the county level or higher--that can very well be a possibility. There's a complexity in managing such a large country, and it's only going to increase. As that complexity increases, it favors local government over central government. Currently, there's a division of labor between central government and local government. Local government manages the economy, and the central government manages politics. In the future that relationship can reverse a little bit: the central government takes on more of a financial role, and local governments take on a more political role.

Lardy: It is inevitable as you move to a market economy that the central government is the big loser in the short run. But if the market really takes hold in China, local governments are going to lose a lot of the power that they have accumulated over economic functions during the last two decades.

Huang: The reason why those centralizing traditions prevailed over the past 2,000 years was that China didn't have any growth, right? And international integration was non-existent. We're going to see a mixture of traditions--old political traditions, but there are new factors on the horizon that would move against those political traditions.

Fan: All East Asian countries have a few common things: morality is important, social norms are important. In Asian countries there isn't much religion. So when you have economic growth you always face this problem because there is no religion or strong ideological identity for the people.

Huang: Also market interactions require trust, right? Regardless of what the government does, there is an objective demand for those social things. They are stabilizers, and I'm absolutely mystified why the government is cracking down on a group like Falun Gong. Apparently the movement was born in the northeast where there's a lot of unemployment. So people sought this sort of mystic way of life to help deal with their economic problems. A government should welcome that, because it's pacifying these people. It's kind of an opiate of the masses.

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