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Jewish World Review Jan. 17, 2006 / 17 Teves 5766 A giant's growing pains By Mort Zuckerman
http://www.JewishWorldReview.com |
Here's a piquant illustration of how China is emerging as a global economic and military superpower. The College Board asked a group of American high schools across the country to consider adding Advanced Placement courses in Russian, Japanese, Italian, and Chinese. Ten times the number of schools opted for Chinese over the other three languages.
The perception of China's rise is sound. In the past two decades, its economy has been growing at 9 percent a year, propelled in part by low-end, labor-intensive manufacturing sustained by an explosive consumer market. China is now also a force in commodity markets, especially energy. The achievement is not one of communism. It can be traced to China's determined shedding of the corset of a planned, top-down socialism in favor of a more market-driven economy that has released the energy and talent of hardworking people. Today, the technical and managerial skills of the Chinese are becoming as relevant as their cheap labor. Indeed, China is graduating so many engineers and sci-entists that they will accelerate its economic growth by throwing more brains at technical problems at a fraction of the cost in the West.
The Chinese economy is also distinguished by an appetite for investment. If you include foreign direct investments of $10 billion to $15 billion a month, the rate approaches 50 percent of gross domestic product—the highest ever achieved in a large economy and dramatically higher than the 30 percent peaks in Japan and South Korea. Again, more freedom is the trigger. Since it became a member of the World Trade Organization in 2001, China has lowered tariff barriers from 41 percent to below 6 percent today. It has the lowest tariffs of any large developed country.
Growing old. The catalog of China's economic impact is longer than its fabled Great Wall. From the perspective of workers in America, Japan, and Europe, a downside to the Chinese economic expansions has been a reduction in the pace of growth in their real wages. At the same time, cheaper Chinese goods have saved American consumers hundreds of billions of dollars while lower inflation has allowed central banks to hold interest rates lower for longer. Along with the Chinese purchases of American government bonds, this has kept long-term rates in America well below their averages at the equivalent stages of previous economic recoveries since 1960. The housing boom here is one beneficiary. So our inflation rates, interest rates, housing markets, wages, profits, and commodity prices are all a function of the Chinese economy.
But how long can they keep it up?
The short to midterm looks positive. Some 25 million Chinese enter the workforce annually. Given the age of its current population, its savings rate of 40 percent, an economy open to investment, a dramatic commitment to mass education and to improving the lives of its own people, and the ability to transfer huge numbers of workers from low-productivity agriculture to higher-productivity manufacturing, China should be able to continue growing at a rate of 7 to 8 percent for the foreseeable future. Let's pause to contemplate what that means: By the middle of the century, the poor country we saw 50 years ago as just so many rice paddies and rickshaws may well be the largest economy in the world. It is an awe-inspiring shift in global power comparable to the rise of Europe in the 17th century and that of America in the 19th and early 20th centuries.
A Chinese proverb goes, "One spot of beauty can conceal a hundred spots of ugliness." And in China, there are a lot of sores. Take its population-planning policy, which limits families to one child. This has averted an estimated 300 million births over the past 30 years, reducing population growth to just 1 percent a year. The result is that China today is aging faster than any country in history. Over the next two decades, some two thirds of Chinese will be in the 65-plus age cohort; by 2040, today's young workers will all be pensioners, at which time there will be 100 million Chinese people over the age of 80, more than the current worldwide total.
The median age in China, which has increased in the past several decades from 20 to 33, will reach an estimated 45 in midcentury, higher than that of the United States. At that point, there will be fewer new workers under the so-called four-two-one population structure: four grandparents, two parents, and one child, raising the fear that China may well grow old before it grows rich. How will the Chinese people support the old when state pensions cover less than a fifth of the workforce and medical benefits cover only 5 percent?
Additionally, the benign social tradition of strong family support looks fragile. Classically, the son is responsible for looking after his parents, and the daughter cares for the in-laws, so that today more than two thirds of those over 65 live with their children and only 1 percent of octogenarians are in old peoples' homes. But how can this be sustained when the birth pattern is such that by 2025 a third or more Chinese women approaching retirement age will very likely have no living sons? Government will face immense pressure to create a broader safety net so that China won't suffer the growth constraints so many countries in the West now face as a result of health and pension costs.
Then there is the challenge of dealing with the 250 million more Chinese expected to migrate from villages within the next two decades. The cities will have to provide public health, education, social services, and urban mass transit for these millions or face social unrest: There are already 200 cities in China with a population of over 1 million. To this burden, you must add the massive layoffs from inefficient state-owned companies (some 45 million workers over the past decade). Where will the capital come from to pay for all of this and still maintain growth?
About 60 percent of business loans in China go to these state-owned enterprises, and many are plagued by corruption and political meddling. No wonder the banks have developed about $650 million of bad bank loans. When a country is growing at close to 10 percent a year and generates so many bad loans, the misallocation of capital has to be gigantic—not to mention the restrictions on available credit for smaller private firms to create more private-sector jobs.
Still, the momentum of change in China is likely to overcome such difficulties. The 40 percent savings rate is stunningly high. Then there are those billions in foreign direct investments. And the huge foreign-exchange reserves are likely to continue if China keeps up the pace of its export-driven strategy that was so successful for Japan, South Korea, and Taiwan.
Stresses. There is a question mark here, too. It is often assumed that China will maintain its export lead because millions of university graduates will give it an edge in world trade. It is not that simple. These new graduates will help domestic output but not exports, at least to the same degree. Why? Only an estimated 10 percent are expected to be qualified enough to work for multinational companies, which hire about 70 percent of China's top graduates and account for more than half of China's success in exports and 85 percent of its high-tech exports. The Chinese export boom, in other words, has more to do with foreign firms relocating their production within China than with China's own businesses undercutting foreign producers.
According to George Gilboy, writing in Foreign Affairs, Chinese firms tend to focus on short-term gains and limit commitments to research and development of new technologies. Chinese companies make most of the goods sold in China, but as Gilboy points out, "They have yet to lay the domestic institutional foundations for China becoming a technological economic superpower."
There are political implications in all this. China must maintain a welcoming posture for foreign investment. Chinese companies will mature and grow more sophisticated and venture beyond China's borders, but to compete in a global economy, China's leaders will have to make structural political reforms. If they do so, Gilboy notes, they will have even more to share with the United States and other industrial countries, including global free trade and support for the international rule of law.
How far will this be possible for a country noted for its authoritarian politics and hobbled by the corruption and waste endemic in a communist system?
Chinese leaders have engaged in the unrestrained looting of public assets, and they have gotten away with it because for the past 20 years, hundreds of millions of Chinese have given them more disposable incomes than at any time in their history. This astonishing prosperity has been accompanied by peace and a respite from the wars and domestic strife that had dogged China for more than a century.
The changes in China have not been without their stresses, however. With growth concentrated mostly in the coastal areas rather than in the interior, it is not surprising that there have been thousands of peasant and workers' strikes and uprisings involving some 3 million people, harshly crushed by local authorities. The new forces now being unleashed in the country are masked by a new Chinese leadership that understands what is called the consciousness of upcoming crisis ( weiji yishi ). These leaders are not isolated from the West, as the leaders of countries behind the Iron Curtain were for so long; they do not exercise the cruelty that Mao did; and they are trying to focus on balancing growth between the cities and the countryside. They know they must resist the temptation to crack down and understand that they will have to represent a new generation of educated citizenry. The proof? Five of the Politburo's seven members and more than half the Central Committee's 200 members stepped down last year—and all were replaced by university graduates.
The basic strategy of the Chinese leadership today is not conflict but the avoidance of conflict. They promote the Communist Party as the way for China to maintain a long, forced stability. They understand that the United States and countries in Asia are wary of China's thrust to become a world power. They wish to continue their economic growth, technological modernization, and military buildup without provoking other countries into a costly rivalry. By and large, China's leaders have managed their politics and their economic policies reasonably well. But they face immense challenges that may yet put too great a strain on their system of a Leninist economy and authoritarian rule.
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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here. © 2005, Mortimer Zuckerman |
Arnold Ahlert | |||||||||||
