How great a challenge does the growth of the People’s Republic of China pose for the world economy?

 

The PRC became committed to a policy of managed marketisation and globalisation in 1987, which was termed ‘capitalism with Chinese characteristics.’ In the decades since, economic growth has lifted more people from poverty than at any other time in history, contributed to the development of global growth, and added a third engine to global markets after North America and Europe. As China is resource-poor, its spending of surplus dollars gained in trade on African and South American markets has also lifted those areas for the first time from the dependency and postcolonial malaise identified by the Brandt Commission in 1980. Western Europe, and particularly Britain, have benefitted from Chinese investment and tourism, and have reached a position of trade balance as European and British products have been sold to the Chinese middle classes.

The immediate ‘challenges’ of such growth have largely been to western institutions and wages. In the longue durée, China’s growth, and that of other East Asian states earlier in the twentieth and twenty-first century, such as Korea, Japan, Vietnam, and Thailand, have been based around lower wages, property booms, and close relationships with western capital and manufacturing industries in joint ventures. These have removed manufacturing jobs from the West, placed pressure on wages, and gradually inflated energy and raw material costs. This has contributed to a fall in the very high western living standards which prevailed from the late 1940s to the 1970s, though western monetary policies and lack of productivity are also to blame.

This process is in part reflective of the return of the world economy to ‘normalcy’ after the growth of Western Empires. For most of human history, East Asia, the Eastern Mediterranean, and Central America were areas of great wealth. This was transferred by outright theft and the application of technological supremacy on the part of Western Europe and its splinter societies from the eighteenth to the twentieth centuries. That a recovery could be effected within half a century, in large part powered by the PRC, is remarkable.

There are downsides to China’s growth, however. Many more people are now alive than were alive in previous centuries. Therefore, if the PRC with over four times the population of the USA alone aspires to American living standards, it must acquire sources of energy, food, and raw materials greater than those currently available to it. Whilst this might create great pressure to innovate, and result in the development of new methods of development, there are very few miracle cures. Neither the Harrod-Domar, Swann-Solow, Rostow, or globalisation models of growth allow for infinite resources.

It follows that China could develop on a path in which it accumulates reserve currency such as the US dollar and euro by trade, spends it on resource acquisition in Africa and Asia, but then attempts to replace the dollar with Yuan. This would lead to turmoil in global markets and a reaction by dollar-based companies and economies which could result in the development of rival currency blocs and trade zones.

Secondly, China could follow the same path as Korea and Japan. This was one of rapid development, followed by demographic collapse as populations aged, property values fell or stagnated, and a greater and greater burden of taxation and dependency was placed on fewer and fewer young people. Under such circumstances, Chinese producers, pension funds, and capital markets, could find that diminishing marginal returns and diseconomies of scale set in rapidly and growth could turn into deflation on an historically unprecedented scale. This fall in consumption in China could then be transmitted to Chinese trading partners, and to a need to make Chinese investments in property and business elsewhere deliver, further lowering western incomes and living standards.

Thirdly, the most obvious places from which China could acquire resources rapidly are Siberia and South-east Asia. With ASEAN and trans-pacific bodies, plus the USA, limiting China’s ability to acquire resources in south-east Asia, Siberia, Canada, Australia, and South America might become key sources for China. A ‘belt and road’ strategy of gaining resources in Africa and Siberia could encourage the PRC to attempt to denominate resources in Roubles, East African Shillings, or Yuan in such as way that the global economy reverses and splits into a ‘Euro/dollar’ area and an Eastern one. This will lower global allocative efficiency, increase duplication, and create resource tension at a level which mixes politics and economics and which would exclude Australia, Canada, and New Zealand from any Chinese-led bloc.

If the USA were deprived of the reserve status of the dollar as a global currency which large numbers of people wished to hold, the US would find funding the US national debt and deficit much more difficult than is currently the case. This would result in the decline of American purchasing power and aggregate demand, and an inflation in countries tied financially to American and domestic and eurodollar markets. The net result could be stagflation,

Fourthly, China’s growth could result in greater inequality inside the PRC, and the growth of global negative ecological externalities arising from China. These could include pollution, waste, global climate problems, and a slowdown in supply chains as strikes and western disinvestment from areas perceived to exploit workers began to bite.

In challenges are opportunities, however. China has largely followed a Lewis model of economic growth and has passed the inflection point during which export-led growth is replaced by internal rebalancing and the development of a large tertiary sector. It has also managed the gradual global expansion of the Yuan without allowing the development of destabilising inward flows of capital or dependence on western banks, as Russia failed to do in 1990-1999. China is also still in control of its own strategic industries, since its growth was based on joint ventures rather than multinational control of its economy. In coming years, population pressures will slow. China still maintains an highly educated, relatively cheap, and very productive class of workers.

Given such ‘upsides’ the challenge of Chinese growth could be accompanied by the development of new technologies, new patterns of energy use, and innovation on an unprecedented scale. Chinese growth could also power the extension of the global economy into space beyond the satellite market, and onto the moon and planets, leading to a boom in materials and economies comparable to the industrial revolution. China could sponsor a new ‘Green Revolution’ in the development of food supplies comparable to the original one, which proved Malthus wrong. Its turn into more expensive forms of steel, capital, and machinery could raise Chinese wages and in itself rebalance the global mismatch between high western costs and lower Chinese ones which caused helped cause disinvestment and deindustrialisation in the west. This, along with smaller populations, might help structural and cyclical unemployment in the west.

The challenge of China to financial markets, particularly if it sponsors a BRICS-based ‘special drawing right’ currency against the dollar or simply floats the Yuan, could also be good for Western economies like Britain and the USA. The former would be forced to become more focussed on manufacturing, productivity, and domestic growth rather than the derivative and financial markets of the London-New York axis, and the latter would be forced to try to lower its vast nominal national debt and budget deficits. These are still recoverable as US debt: GDP ratios are not at practical or mathematical levels where debt destruction by hyperinflation or forgiveness are the only options. A global challenge which made private debt less available and forced fiscal limits on the federal government whilst raising interest rates on new debt would not necessarily be a bad thing. Competition is good. American, British, African, Asian, and South American innovation might grow from competition and challenge after a period of pain.

The world economy is ‘owned.’ It is a congeries of banks, multinational corporations, governments, and international bodies which make it work. Work, production, and value, however, is derived from the productivity and growth produced by human beings. No one country or area has any right to that ownership, so it follows that ‘the challenge of China’ is a way of talking about the return to normalcy of China within the world economy. Such a challenge might herald a period of great human growth and prosperity so long as it is focussed on equitable technological development within ecological limits. If it is based on reckless exploitation, then diminishing marginal returns, stagflation, and temporary ecological or demographic collapse leading to resource wars will ultimately end the challenge, whilst making everyone poorer.