As we approach 2021, there are more indications of a return to pre-pandemic normality, at least in countries not recovering from the dangerous new variants of the coronavirus. High-frequency economic indicators in many parts of the world are strengthening, concerns about mass unemployment are giving way to fears of inflation, and the G7 has just held a summit on a personal level.
But there is a problem at the heart of the global economy: China’s interactions with the rest of the world seem to have taken another negative turn as a result of the epidemic.
Having created the BRIC (Brazil, Russia, India and China) class in 2001, I closely followed the rise of China and came to be seen as a Chinese bull. I was excited about the country’s economic potential in 1990 when I first visited Beijing while working for the Swiss Bank Corporation. As I wandered through the lively street markets of the capital, I was surprised by how natural it was. Can this so-called “communist” country become a major force in the global economy?
This question remained on my mind throughout the 1990s, in part due to the constant handshake of international macroeconomists over the global economy’s growing dependence on American consumption. These concerns have accumulated since my early days as a professional economist in the 1980s, when I was at the center of the political dilemmas surrounding the Plaza Accords (1985) and the Louvre (1987).
At the time, US politicians were keen to stimulate domestic demand in other developed countries (namely Germany and Japan). After China’s relative success in dealing with the 1997 Asian financial crisis, I came to see it as the alternative global engine that everyone was looking for.
But the goal of increasing domestic consumption poses a dilemma for the Chinese development model. Most data shows that Chinese consumer spending still likely accounts for less than 40% of the country’s GDP. Investment spending and exports are what have fueled the Chinese giant for most of the past three decades (especially in the early years). China’s modest consumption-to-GDP ratio contrasts starkly with that of the United States, which may be excessive at around 70%. The result, in relation to the global economy, is that Chinese consumer spending is technically only a third of that of American consumers.
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But it is worth noting several additional points. While Chinese consumer spending remains relatively low, it has increased by about one-sixth of that of the United States over the past 20 years. Moreover, this marginal growth has had a much stronger impact on the global economy than changes in US consumption. The global influence of the Chinese consumer has more potential for growth than the influence of the United States.
So it is in everyone’s interest that Chinese consumer demand continues to increase. While China’s consumer spending is unlikely to reach 70% of GDP, an increase to 50% is a perfectly reasonable and desirable goal for both China and the world. If China’s GDP (in current US dollars) grows to that of the US by 2030, a consumption-to-GDP ratio of 50% would mean an additional $4 trillion in consumer spending globally.
In their recent deliberations, Chinese leaders expressed their desire to double household income over the next 15 years, implying an average annual increase of about 4.5% in real (inflation-adjusted) GDP. Given China’s aging workforce, this goal is far more realistic than trying to match previous double-digit growth rates, and would be largely consistent with the rise of the Chinese economy on par with the United States. But if China’s consumption-to-GDP ratio does not rise, I doubt it will achieve its goal.
Like any other country, China’s economic growth will be driven in the medium term by its productivity growth rate and the size and composition of its workforce. As workforce growth stops, more economic growth must come from increased productivity.
Paradox for the Chinese للصين
Here, China has to resolve a major contradiction. The most productive sectors of the economy are usually manufacturing, not services; In manufacturing, it is easier to achieve more productivity gains. But at the same time, China must strengthen the role of personal consumption, which generally means increased demand for services. Achieving both goals at the same time is easier said than done.
Even before the COVID-19 pandemic, it was clear that China’s economy was simply too big for politicians to ignore the global implications of decision-making. Issues ranging from Chinese tech giants like Huawei to the presence of Chinese students in Western universities have become sources of tension. And of course, there are international concerns about the human rights situation in China and the internal failures that have allowed COVID-19 to go from epidemic to pandemic.
Ultimately, China will need the rest of the world if it is to increase domestic consumption and productivity. The best way to improve its international standing is through soft diplomacy that respects the preferences and aspirations of other nations, rather than treating them as sources of confrontation. Without such a shift in attitude, China will not achieve its goal of doubling income in 15 years, leaving its people – and the rest – in a worse situation.