China began to implement economic reforms in 1978, which enabled it to transform from a planned to a market based economy. The reforms have enabled the country to achieve an average economic growth rate of 9.5% in the last three decades. In 2011, China became the second largest economy after the United States of America. Most Chinese economists believe that their economy will catch up and surpass that of the USA in the next decade. However, some economists believe that the Chinese economy cannot surpass that of the USA due to its inherent challenges (Dreyer 233-246). This paper will analyze China’s ability to surpass the USA’s economy and the effect that China may have on the world economy if it becomes the next economic power. The analysis will be based on two articles that describe the economic situation in the two countries. I will argue that China’s economy will surpass that of the USA in terms of GDP per capita by 2050.
Summary of the Articles
Robert and Skidelsky argue that western economies will not rebound unless they reduce consumption in favor of savings and capital formation. They assert that most countries are yet to reach the era of consumption. They support this view by identifying China as one of the countries that still focus on large scale saving and investments. On the contrary, they argue that western countries’ consumption has risen significantly in the last few years. According Robert and Skidelsky, high consumption in western countries is due to the desire to improve the quality of goods. Concisely, improvements in product quality lead to serial consumption. Even when the improvements are subtle, consumers are still lured into high consumption through advertisements. Consumption is also high due to the relative nature of wants.
Concisely, the more we accumulate wealth, the more we realize our relative poverty. In addition, the increase in inequality between the rich and the poor has led to increased consumption through borrowing in order to bridge the income gap. Robert and Skidelsky give the following suggestions to curb over consumption. First, the government should improve job security by systematically eliminating the cap on the number of working hours per week in various industries. This would enable people to work for as long as they want. Second, the government should guarantee “an unconditional basic income for all citizens” (Robert and Skidelsky). Finally, the government should restrict advertising in order to discourage consumption. Additionally, it should introduce a high progressive consumption tax. This will discourage consumption and enhance private saving.
Dreyer lists the factors that are likely to slow China’s growth in future. These include international relation issues, unemployment, corruption, environmental degradation, effects of globalization, unstable financial system, inadequate safety net, increasing income inequality, energy shortage, and changing demographics (Dreyer 233-246). China’s population is growing rapidly, thereby necessitating continued high economic growth in order to improve GDP per capita. China’s one child per family policy has resulted into a male-female ration of 113-119:100, thereby limiting men’s possibility of finding wives in future. This is likely to cause social unrests that will undermine economic growth. The depletion of China’s energy sources also pose a threat to its future economic growth because it has to depend on imported energy whose supply is not guaranteed. Continued use of fossil fuel has led to increased environmental degradation, which poses a threat to agriculture and food production (Dreyer 233-246).
The government’s attempt to reduce regional income disparities has faced serious resistance, especially, in the west where poverty level is still high. Additionally, high corruption limits the government’s ability to implement programs that will alleviate poverty in the low-income regions. The high unemployment rate in China is likely to create social upheavals that will undermine economic and political stability in future. Additionally, China’s financial system is unstable due to the large amount of non-performing loans that were advanced to inefficient state owned corporations. Failure to recover the loans can lead to a financial crisis, thereby reducing economic growth. Since China’s economic growth depends on exports, negative changes in the global economy will adversely affect the demand for its products. Consequently, its economic growth will reduce (Dreyer 233-246).
Arguments for China’s Future Rapid Economic Growth
Despite the challenges discussed in the foregoing paragraph, the Chinese economy is likely to overtake that of the USA due to the following reasons. To begin with, nearly all the challenges are being addressed by China’s 12th five-year development plan. The plan covers the period between 2011 and 2015 and it aims to achieve the following. First, the government is currently rebalancing the economy by shifting its dependence from fixed asset investment (FAI) and exports to domestic consumption-based growth. This involves focusing on a lower GDP growth rate of about 7.5% in order to reduce expenditure on FAI in favor of consumption.
The 7.5% growth rate will also enable the government to increase employment and GDP per capita (APCO 1-12). In order to promote innovation and domestic product development, the government has set aside RMB 4 trillion to be invested in seven strategic emerging industries. The industries include biotechnology, next-generation IT, and new energy among others. Developing these industries will ensure that China shifts from manufacturing goods on behalf of other countries to manufacturing its own products. By improving domestic consumption, China will be able to reduce its dependence on exports, income disparity, and to eliminate the “need to maintain an artificially weak currency” (APCO 1-12).
Second, the government is implementing social equality policies that will ensure equitable distribution of wealth among citizens. This involves increasing urbanization and improving social safety nets for the rural population by providing health care insurance and enhancing land distribution. The government is also implementing measures such as subsidies, land credit, and reduced taxes to companies that are willing to invest in the central and western parts of the country (APCO 1-12). Consequently, these regions will catch up with the eastern part of the country in terms of development. Additionally, the government will reduce regional income disparity by raising minimum wage by 40%, expanding social welfare programs, improving the health care system, and expanding labor intensive-industries in the underdeveloped regions.
Finally, the government has embarked on protecting the environment by implementing policies that reduce pollution, promote energy efficiency, and the production of clean energy. In particular, the government has invested in energy conservation technologies, as well as, new sources of clean energy such as nuclear, and hydropower. Consequently, the country will reduce its carbon emission by 45% by 2020 (APCO 1-12). These measures will improve the quality of the environment, thereby reducing the diseases caused by pollution. Additionally, protecting the environment will promote agricultural and food production, thereby creating jobs and reducing poverty in the rural areas. The 12th development plan is expected to increase China’s GDP from $12 trillion to $20 trillion, thereby overtaking that of the USA, which is expected to reach $18 trillion by 2019.
Even though China is already implementing a master plan to help it overcome its development challenges, the USA still has several unresolved economic problems, which include the following. To begin with, the USA is facing serious energy problems. The cost of energy is on the rise, whereas the production of oil and gas in the country has reduced significantly (Gordon 1-24). Consequently, the US will have to depend on imported oil, which will be very expensive due to the weakening of its currency. The government is not able to continue developing clean energy sources due to escalating costs. Consequently, it has focused on promoting the use of fossil fuels, which will severely harm the environment and cause diseases that will lower the productivity of the population.
The second problem in the USA is the large budget deficit, which has led to significant expenditure cuts on social safety nets. The expenditure cuts are likely to increase poverty levels by denying several people access to basic needs such as health care and eliminating jobs in the public sector (Gordon 1-24). This is a precondition for social unrest that will reduce economic growth. Finally, the economy of the USA is likely to achieve only a 2% growth in the next decade, thereby increasing the possibility of being overtaken by China.
Implications of China as an Economic Power
Even though China is likely to overtake the USA, its leadership at the global level is likely to be limited to economic influence. As an economic power, China’s business cycle will affect that of the rest of the world. For example, an economic crisis in China will spread to other countries. China will also be an important price setter due to its ability to maintain low costs in production. Moreover, China is likely to be the main source of capital and foreign aid to most countries. In the last three years, China has lent more money to the world than the IMF and World Bank. Both developed and developing countries, including the USA, are likely to continue borrowing from China to cover their budget deficits (Gordon 1-24). Nonetheless, the USA and other developed countries are likely to maintain their political and military influence at the global level. This is because China’s military power and political influence is still very limited.
The aim of this paper was to analyze the ability of China’s economy to surpass that of the USA. Even though China has several development challenges, it has begun to address them in its current economic blueprint. The USA, on the other hand, is still struggling to overcome its development challenges. Consequently, China’s GDP is likely to exceed that of the USA by 2019. However, China’s GDP per capita can only exceed that of the USA by 2050 due to the large size of its population. Additionally, China’s leadership is likely to be limited to economic influence due to the limited capability of its military power and political influence.
APCO. China’s 12th Five-Year Plan: How it Actually Works and What is in Store for the Next Five Years. Beijing: APCO, 2010. Print.
Dreyer, June. Democratization in Greater China: The Limits to China’s Growth. Academic. London: Elsevier, 2004. Print.
Gordon, Robert. Is U.S Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. Business. Massachusetts: National Bureau of Economic Research, 2013. Print.
Robert, Charles and Edward, Skidelsky. Enough is Enough of the Age of Consumption. Financial Times, 2012. Web.