China's Next Great Challenge: Scarcity
China will soon surpass the United States as the world's largest economy, but this is the least interesting thing about it.
Damien MaWilliam Adams
Feng Li/Reuters
The following is excerpted from the book In Line Behind a Billion People: How Scarcity Will Define China's Ascent in the Next Decade.
One Beijing morning in early November 2012, seven men in dark suits strode onto the stage of the Great Hall of the People. China's newly elected Chinese Communist Party (CCP) Chairman Xi Jinping stood at the center of the ensemble, flanked on each side by three members of the CCP Politburo Standing Committee. It was the outside world's first chance to take stock of the committee that will run China for the next decade—one that will mark many milestones. Under Xi's watch, which is scheduled to last until 2022, China is expected to overtake the United States as the world's largest economy. That moment when it arrives will likely lead many in the West to pontificate about the reshuffling of the global pecking order. Inevitably, they will breathlessly proclaim that having held the world's "gold medal" for largest GDP since around the turn of the 20th century, the United States, will have to yield to China, the new "number one."
That Chinese economic growth has been a success is beyond dispute. Since 2005, China has sprinted past Germany and Japan to become the world's second-largest economy. By the end of 2012, with a GDP preliminarily estimated at $8.3 trillion, the gap between China and number-three Japan in terms of economic output is as large as the entire French economy. Little wonder that "an American 20th century yielding to a Chinese 21st century" has become a popular refrain, as a flurry of commentators and authors argue that the world should prepare for the possibility that it will once again be centered on the Middle Kingdom.
The day that China assumes the mantle of world's largest economy will invite both envy and trepidation, and global perceptions could shift rapidly. The approach of this psychological threshold has already led some quarters of the global cognoscenti to declare the irreversible decline of the American idea as the enduring viability of the China model supplants it. Amid the anticipated "declinist" commentary in the United States and elsewhere, however, too few will pause to ask "so what?" Should China's continued rise really inspire such alternating anxiety and cheerleading? Yes, China is almost guaranteed to become the world's leading economic power, but this achievement will paradoxically say less about China's growing strength and influence than conventional wisdom assumes.
That China will eclipse the United States in absolute GDP terms shouldn't be particularly surprising—it is, after all, home to four times the population of the United States. But perhaps the speed with which China has caught up with the rest of the world, a pace that not even China's own leaders anticipated, will be surprising to many. Yet the speed of growth will no longer be the dominant preoccupation of the country. The perennial "bulls and bears" debate on China's prospects, exclusively focused on the state's struggle to maintain rapid growth, overlooks a more fundamental truth.
Either a continuation or an interruption of growth is unlikely to alter the country's sociopolitical core after 30 years of breakneck development. China has, in fact, already weathered several jarring economic cycles since its transition to a market economy, though the country's statistical system obscured the direct effects at the time. If the country were on the verge of economic and political collapse the moment real GDP growth dipped under 8 percent, it would have already collapsed several times by now. In fact, the Chinese economy is more resilient to the business cycle than is typically acknowledged.
Yet in spite of this, the country's economic and political rise will constrain as much as empower it over the next decade. It will be an era in which the country's ability to sustain economic growth becomes less of a concern. What instead will define China is also what has always defined it: scarcity.
The crucial and intersecting challenges of scarcities, both emerging and intensifying, will consume China's custodians over the next decade. Scarcity is the keen lens through which the economic, social, and political constraints that accompany China's rise can be seen most clearly. Economic dimensions of scarcity are perhaps the most obvious and are subject to frequent discussion. China's supplies of natural resources and labor, the critical inputs that have sustained its stellar growth, are increasingly stressed. Resource scarcity is about to force difficult changes in China's growth model, whether the country is prepared or not. Food, too, faces renewed supply constraints as burgeoning Chinese consumption adds a new set of pressures on domestic production. But as previous decades have witnessed, what happens in China can rarely be contained within its borders. These challenges of scarcity will have far-reaching implications for global supplies, global prices, and global politics.
Although they undeservedly receive much less attention from observers outside China, social dimensions of scarcity will pose as much if not more of a constraint on the country as economic scarcity over the next decade. Whether it is healthcare, education, or the social safety net, public goods in China are in short supply even considering the country's level of economic development. Social dimensions of scarcity, more than simple matters of supply and demand, are also symptoms of intensifying Chinese inequality. Over the three decades in which the Chinese government shifted its emphasis from "class struggle" to economic development, the deepening of inequality has coincided with, and in some ways spurred, the emergence of new social classes in China. New categories such as "elite," the "middle class," and the "migrant class" are far cries from the simple bifurcation of proletariat and capitalist during the halcyon days of communism. Most members of all three groups live materially better lives today than at the end of the planned economy in 1978. But unequal distribution of both the burden of paying for public goods and the access to them often overshadows an aggregate improvement in general welfare.
The emergent middle class and migrant class—that is, the two groups that comprise the majority of China's population—find themselves increasingly in competition over access to social welfare services. The country's sheer scale and density virtually guarantees that competition for social goods like health care and pensions will be fierce; structural inequality serves to make what is already scarce even scarcer. What's more, rapid changes in China's demographic structure—with retirees multiplying exponentially and the labor pool stagnating—mean that demand for social goods is rising at the same time that future supply remains in limbo, exacerbating anxieties over scarcity.
Migrant and rural grievances center on the scarcity of opportunities for educational advancement and related barriers to their equal membership in urban life. China's public health, education, and retirement systems are designed in part to keep urbanites happy at the expense of rural Chinese; they are biased toward urban areas. These policies ensured urban support of the social and political sta-tus quo when city dwellers recognized that the government was prioritizing their privileges over their more easily controlled, isolated, farm-bound country cousins. But today, when "rural" Chinese float itinerantly from city to city and share information instantly over their mobile phones, this old stabilizer has become a political liability.
Urban middle-class anxieties, in contrast, revolve around the indispensable public goods that they cannot simply buy from the private market: principally among them, the guarantee of safe food, clean drinking water, and healthy air to breathe. And even though they stand ahead of rural Chinese in line for college entrance and hospital admission, urban residents, too, feel hard pressed by the scarcity of good job opportunities for a college-educated workforce. More recently, "the good life" they should be able to provide their families has become a moving target as expectations constantly rise one step ahead of reality. This scarcity of public goods is experienced at a micro level, but has profound macro implications. For instance, how can a hamstrung education system generate the human capital to build an innovation economy? How can the "only-child generation" trust their sick or retired parents to the care of a social safety net punctured with holes?
Similarly, political and institutional scarcity will hamper China's global ascent, even as the country marches toward economic leadership. A paucity of individual freedoms, compelling values, and ideological sustenance will constrain the country's progress and undermine its government's amply funded image-building efforts. To be sure, average Chinese people are freer today than ever before to choose their job, their spouse, where they live, the entertainment they enjoy, and the language with which they express discontent with the government—freedoms that make the shrinking body of topics that they absolutely must not discuss seem comically anachronistic. Mainstream Chinese do not necessarily believe that a government "by the people" is the optimal option for China. But they do appear to yearn for a government that is "for the people." The issue for most in the Chinese middle class isn't one of better political models but rather one of expectations for transparency, accountability, and legal norms from their rulers. In the age of instant information and constant connectivity, the Chinese public has little tolerance for a dishonest and opaque government.
The Chinese public has up until now accepted the government's grand bargain: staying out of politics in exchange for prosperity. But will they continue to do so when social equality and good governance trump material welfare as their top concerns? As the CCP gropes for a post-economic growth platform for its rule, the scarcity of values, beliefs, ideas, rule of law, and freedoms that are the hallmarks of an open and tolerant political system becomes harder and harder to ignore. Justifying the party's governance will now depend on deliver- ing on middle-class demands for competent, humane, and account- able governance.
The vast majority of Chinese still believe that the state ought to play a strong role in the economy, certainly a stronger one than that played in the United States. But they are no longer content with the outsized role the state played in the past. In various ways, they appear to be demanding that it retreat from the economic and social realms to create more room for individual freedom and the flourishing of innovative and entrepreneurial dynamism—for the modernity to which China aspires. As more and more Chinese people spend time overseas and seeing the country from the outside becomes familiar, the Chinese public is already recognizing that they too have a say in their country and its global image. That is, in fact, how enduring soft power is accumulated.
Whatever China has done it has done in a hurry. A decade's time at Chinese speed creates as much change as occurs in other countries over one or two generations. Yet speed, whether in GDP growth or an aging society, will be counterproductive to the coming era of Chinese development. China can rest assured over the next decade that it will have significantly narrowed the economic gap with the developed world, barring some unforeseen collapse of growth. The gaps that it must now narrow, after much neglect, are social and political. Each one of its challenges is formidable in and of itself. But the convergence of all three—economic, social, and political—will require Beijing to harness all the resolve and ingenuity at its disposal.
The new Chinese leadership faces a stark choice: summon its political will and forge forward boldly, risking destabilizing changes along the way, or keep its finger in the dyke and risk losing itself and the Chinese public to festering, pervasive social discontent. The political system has absorbed discontent and de-escalated seemingly intractable conflicts more than once—whether it can do so again, without significant changes, remains a looming unanswered (and unanswerable) question.
In the meantime, as outside observers expect the world's soon-to-be biggest economy to exert ever more influence globally, and its own population's expectations rise, Beijing's mandarins face an unprecedented post-development narrowing of options and acute pressure to usher in considerable changes to its political economy. It is these intense pressures and the difficulty of managing change that will dictate the country's behavior, ironically making China a very reluctant economic superpower, begrudgingly pulled into the global spotlight.
Ultimately, a balanced and nuanced portrait of today's China is one of a nation of great aspirations, great achievements, and great limitations. China will need to make fundamental changes to its economic and political ecosystems over the next decade to prevent its limitations from overwhelming its aspirations. But the dramatic transformations that have sprouted every ten years or so since the founding of the modern Chinese republic are reasons to believe that changes will come, if not willfully, then by the indomitable force of necessity.
Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.
William Adams is a research associate at the University of Pittsburgh's Asian Studies Center and a senior international economist for PNC.