China’s Second Centennial Goal will be Easier on some Developing Countries - and Harder on Developed Countries
In late October, the fifth plenum of the 19th Communist Party of China (CPC) Central Committee launched the overall framework for China’s 14th Five-Year Plan (FYP) (2021-2025). This Plan is unusually significantly for it marks the transition from China’s first to second centennial goal. Over the next decade it will become apparent that this offers divergent challenges for advanced economies against poorer ones, with the latter, at last faring better.
China’s First and Second Centennial Goals
The CPC was born on July 23, 1921; the People’s Republic of China was established with the CPC at its helm on October 1, 1949. Two important political economy milestones are set around the one hundred-year anniversaries of these two occasions.
The first centennial goal (FCG) is to “build a moderately prosperous society in all respects, by 2021. This translates to meaning that no person in China should be living in absolute poverty by 2021. The second centennial goal (SCG) is to “build a modern socialist country that is prosperous, strong and culturally advanced and harmonious” by 2049. In practical terms, this means that by mid-century China’s economy will have reached the frontier in technology and science, and its citizens will be well-off accordingly.
What that means, in sum, is that over the period of realising the FCG, China’s focus on poverty and low and middle-income industrial sectors presented vast competition for today’s poorer countries. But, as the SCG is achieved, it is likely to be industries typically associated with high-income countries that China increasingly gains competitiveness in.
The First Centennial Goal: Easy on Rich Countries, Hard on Poor Ones
Achieving the FCG essentially means eliminating absolute poverty. China’s success in reducing – and being very close to eliminating – extreme poverty over the past 40 years has been remarkable. In 1981, China’s poverty head count index, measured by US$1.90 per day in 2011 PPP, was 88.32 percent of the population. The poverty incidence in rural areas was 95.6 percent. By 2016 the poverty rate was 0.53 percent (0.99 percent in rural areas). These numbers translate to a reduction of 870 million in the number of poor people, from 877.8 in 1981 to 7.3 million in 2016. By late 2020, a vigorous campaign is attempting to ensure the final and most remote of China’s absolute poor cross the ‘xiaokang’ (basic prosperity) line.
Economic and institutional policy shifts instigated China’s economic gains from 1980, and targeted consequential poverty alleviation. Over most of FCG period, however, China also enjoyed the additional growth fruits of a demographic dividend also. This is, the growth fruits that can be captured by productively utilising an elevated working-age population share. In China’s case this added the equivalent to 1-2 percentage growth points annually, for almost four decades from the early 1970s.
While China deserves credit for its transformation, its success was also propelled by a parallel demographic dividend across the industrial world. This ‘double demographic dividend’ produced a largely complementary symphony of relatively smooth global growth, until 2008. For China’s part, it incentivised foreign investment in labour-intensive light-to-increasingly heavy industries, whether high polluting or otherwise. Increasingly, its more advanced coastal manufacturing hubs became the centre of world trade, and manufactured goods export powerhouses in particular. From the 1990s and after joining the WTO in 2001 especially, China hence became the factory of the world.
Meantime, a number of factors unique to China such as its complex foreign exchange restrictions and high rates of precautionary savings meant that over these decades China became home to world’s largest-ever national savings level. The net effect of China’s high savings rate and low-cost manufactured exports was that despite enjoying a demographic dividend boom and sustained growth overall, in high incomes countries inflation and interest rates remained relatively low.
For the West’s part, over the second half of the 20th century pollution-, energy- and labour-intensive industries were gradually outsourced to East Asia, and to China from the 1990s especially. High-income economies in turn imported trillions of dollars in low-cost manufactured goods from China over decades. In return they exported higher value-added manufactured goods and services. In the case of high-income countries such as Australia and Canada, a decades-long commodities export boom was enjoyed – amid low inflation and low interest rates, thanks to the characteristics of China’s economy as it worked toward achieving the FCG.
2010s: Slow Death of a Parallel Low and High-Income Country Demographic Dividend Era
The complementarity symphony of growth between China and the high-income world has been under strain since the Great Crash of 2008. That point roughly coincides with when China and many OECD countries experienced working-age population peak. The growth trajectory of high-income countries has struggled to recover since, with population ageing being one factor attributed to that sluggishness.
That complementarity demographics-rich high and low-wage growth symphony was less than ideal for many of the world’s other poor countries, especially those lacking commodity-wealth. They suffered a double terms of trade shock such – more expense commodities on the one hand and intensive competition from China in low-wage industrial sectors. This helps to explain their lack of success in being able to enter low-wage labour-intensive global value chains over recent decades.
China as the factory of the world, that is, for countries such as Ethiopia and Kenya, presented imperfect circumstances for development prospects at home. As Chinese economy moves away from a labour-intensive inbound-investment-driven and export-led model of growth, and toward a more capital-intensive and outbound-investment-driven growth, prospects for development of such economies should become more favourable. Moreover, most such countries remain ‘young and poor’, hence offering, at least in theory, the domestic equivalent potential China offered four decades ago.
The last mile of China’s efforts to realise the FCG have arisen in parallel to a more contentious global economic environment for China. First, China begun to take an intensified interest in investing in infrastructure and pockets of labour-intensive manufacturing in countries like Kenya and Ethiopia, under its Belt and Road Initiative. Second, patience for and of what is regarded as unfair Chinese competition in manufacturing and services sectors has brought direct tensions with rich countries, as has China’s rising competitiveness therein. The combination implies double the economic competition for rich countries – just at a time when the risks of a productivity tsunami around intensifying high-income population ageing is sinking in.
The Second Centennial Goal (from 2021-): Easier on Poor Countries, Harder on Rich Ones?
The SCG has two stages: 2021-2035 and 2036-2049. The first stage has a 2035 goal post of realising “socialist modernity”. The latter encompasses the original ‘four modernizations’ of agriculture, industry, science and tech, and defence. It also more generally includes the governance system, human resource development, public health, education, sports and culture.
To get there, is noted that China will need to double its real per capita GDP, implying a growth rate of just under 5% annually over the next fifteen years. Not only as the goal comes into focus has the size of China’s GDP reached the total economic size of the EU’s 27 member countries, but by 2035 by any measure China’s economy is likely to be greater than that of the USA.
If and as goals to reduce both urban-rural and coastal-hinterland inequality are achieved, the number of middle-income earners in China will double, from 400mn to 800mn. As compared to earlier China-West when a low-income demographic bubble in China fed a high-income demographic bubble in the West, over the coming few decades there is likely to be more competition between China and the West.
Structurally, China may be better positioned to navigate this transition: its young are disproportionately more educated than their parents, offering a new talent dividend to China’s next phase of growth that was not there for the last one. In contrast, high-income countries are set to lose hundreds of millions of talented workers – in the form of the retiring Baby Boomers, concurrent with having to pay for their retirement and facing greater Chinese competition.
For today’s non-fuels-export-dependent low-income countries, however, China’s SCG may be a boon. As China moves out of low-income sectors, and increasingly seeks to invest in today’s low-income countries, there is a new chance for development of those countries, if other conditions come together also. Technology shifts, demographic change, and so on, will likely mean that labour-rich developing countries of tomorrow differently capture their demographic dividend to how China and other East Asian countries did. They may yet forge such a pathway of their own.
Indeed, from later this decade, China will join more the ranks of countries that are already in a sustained period of population decline. China, at least and however, has uniquely been preparing for population ageing, and presumably population decline, for decades.
Rich countries, in other words, should rapidly begin preparation for the sort of double whammy faced by young, cheap-wage, resource-poor economies in places like Africa over the last few decades, thanks to China. That is, over coming decades it is likely to be rich countries that face such a double whammy. In this case, a rising elder dependency ratio built on high-cost pensioners (over China’s low-wage pensioners) and new and intensive competition, at home and abroad, from China rising competitiveness in higher value-added manufacturing, science and services alike.
Ideally this leads to a new levels of innovation that benefit all.
The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.
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