China's Economy in 2020: The Challenge of a Second Transition

Pieter Bottelier is Senior Adjunct Professor of China Studies at the Johns Hopkins University, School of Advanced International Studies. Prior to this, he held positions at the Center for Strategic International Studies (CSIS) and the World Bank. He is the author of many articles on economic reform in China. He can be reached at . Note u This essay is a revised version of a paper that was presented at an NBR conference titled “China 2020: Future Scenarios,” Airlie Center, VA, February 15–17, 2007. China’s Economy in 2020: The Challenge of a Second Transition Pieter Bottelier asia policy, number 4 (july 2007), 31–40 • http://asiapolicy.nbr.org • executive summary asia policy Since the massive economic restructuring of the 1990s, China has experienced unprecedented output and productivity growth, defying predictions about imminent financial crises and outperforming even the most optimistic predictions. Yet questions about the next phase of China’s economic growth, or “second transition,” now loom on the horizon. This plan—which involves reducing the relative importance of low value-added manufacturing, increasing reliance on domestic innovation, making China’s economy more energy efficient, reducing social inequality, and providing better environmental protection— will be fraught with challenges. These challenges include reducing the dependency on net exports and investments for growth, increasing domestic consumption as a share of GDP, and strengthening the social security system. How this second transition plays out will determine China’s economic course in 2020, as these reforms could lead to three starkly different outcomes. possible scenarios • A successful second transition u Beijing effects a new political economy that spurs innovation, increases domestic consumption, successfully depreciates the low value-added manufacturing sector, creates enough new urban jobs, injects more resources into the service industries, and executes timely reforms that deliver positive results and sustained growth. • A failed second transition u A “perfect storm” of adverse developments— such as falling productivity growth and growing urban unemployment triggering urban unrest—leads to serious economic and political problems and brings about dramatic economic decline with attendant political ramifications. • “Crisis management” u A successful second transition is stalled or delayed beyond 2020, and mutually reinforcing economic and political problems intensify. The one-party state adroitly—but with increasing difficulty— manages crises in such a way that a “perfect storm” is either avoided or delayed beyond 2020. [ 33 ] bottelier • china’s economy in 2020 The purpose of this essay is to stimulate informed discussion in the United Stated both on China’s economic outlook and on U.S.-China relations. China’s future economic trajectory will be influenced by many domestic and international factors, including U.S. attitudes and policies toward China. The essay identifies three stylized scenarios for China’s economy in 2020. In reality, the range of possible outcomes includes many shades and gradations of these scenarios. Following a brief explanation of the main factors underlying China’s phenomenal economic growth during the past quarter-century and the country’s unique approach to the management of economic transition, the essay focuses on key economic and social challenges facing China today and the country’s ability to deal with those challenges. Understanding Past Economic Growth Between 1978 and 2003, China’s economy outperformed even optimistic expectations.Whydidpredictionsofaseriouseconomicslowdownorfinancial crisis not materialize—at least not so far? Why did the economy consistently outperform even the most optimistic forecasts? In its “China 2020” study of 1997 the World Bank pointed out that China’s GDP in 1995 was about double what the Bank had predicted in 1985. For the period 2001–10 the bank expected a drop in growth from 9.8% (1985–95 average) to 6.9%. Through the end of 2006 actual growth averaged about 10%, and there is no expectation of a sharp decline any time soon. Many also underestimated the importance of China’s rise for the rest of the world. As recently as 1999, recognized China expert Gerald Segal, then director of the International Institute for Strategic Studies in London, wrote that “China is a small market that matters relatively little to the world, especially outside Asia.” At the time—only eight years ago—this opinion was widely shared. With the benefit of hindsight, it is possible...