by Lipton Matthews
There has been much debate in academia and business about China’s future as the world’s new superpower. However, commentators tend to downplay the numerous challenges which China faces. These problems include:
(1) an ageing population;
(2) pollution and
(3) an inefficient growth strategy.
China’s population is ageing; by 2050 a quarter of the population will be over 65 years. This transition to a geriatric demographic will create several challenges for China.
Currently, there are around 170-180 million Chinese aged over 60, just over 13% of the population; within twenty years this number will become 360 million and by 2050 more than 430million. Not only will this situation result in a drop in savings and an increase in unfunded liabilities, but it also means a shrinking labour force, leading to reduced growth in China and the Asian Tiger will no longer be the factory of the world.
But if things go as they have since the dawn of civilization, some other country will take up the slack and become the next factory of the world.
There are 980 million persons in the active labour force in China; however based on the analysis of Professor Zhen Binwen of the Chinese Academy of Social Sciences this number will reach its peak in 2015; and then will decline drastically.
Professor Cai Fang, Director of the Institute of Population and Labor Economics estimates that the declining labour force will lower China’s annual growth rate by 1.5 percentage points from now to 2015 and it will decrease by a further percentage point during 2016-2020.
As China’s population ages there will no longer be a glut of labourers. Wages in China have increased by over 15 percent during the last six years. China is no longer the land of cheap labour; manufacturers are now heading to Mexico and Southeast Asian competitor labour markets.
Environmental degradation is also another hurdle for China. Air and water pollution kills over 750,000 individuals annually in China. According to TIME Magazine, among the world’s most polluted cities are Linfen and Tianying, located in China. Pollution will affect the health of Chinese workers and unhealthy labourers cannot be productive. Further, health costs of air and water pollution amount to 8 percent of China’s GDP. Sustainable development was not pursued by China’s leaders and the nation is now reaping the dire consequences.
Additionally, China has pursued an unsustainable investment led growth strategy; investments accounts for 50 percent of China’s GDP. China has followed the Asian development model created by Japan. According to Alice Amsden this policy is known as “getting prices wrong” in order to achieve high levels of investments to spur growth the state subsidizes strategic sectors to make them appear lucrative and less risky. Furthermore, the government creates distortions in the market by manipulating foreign exchange rates and interest rates, thereby making a surplus of capital available for investments.
This policy is unstable because by manipulating rates; distortions are created in the market, excess capacity is generated and money is wasted. Funds are also invested in inefficient subsidized companies, therefore the debt level rises, bad loans are created and a financial crisis will emerge.
Even China’s premier Wen Jiabao described the economy as “unstable, unbalanced, uncoordinated and ultimately unsustainable”. China will only become a superpower when its political and economic systems are reformed and the rule of law is strengthened. Xi Jinping has highlighted the need to modernize China’s economy; and interest rates will now be determined by the market.
But the question should be, can the Communist Party of China survive this transition without becoming more democratic?
Lipton Matthews is a first year law student and is unusual in being a Jamaican Conservative Capitalist Teenager. He can be reached at email@example.com