Posted in Finance Articles, Total Reads: 12904
, Published on 07 February 2012
While most of China was walking the path of communism shown to them by their charismatic leader Chairman Mao Zedong, another prominent figure in the Communist Party of China (CPC) – Deng Xiaoping had a different vision on the means to achieve progress in China. It was with this in mind that he quoted the above phrase, which implied that it did not make a difference whether the policy was socialist or capitalist so long as it brought about economic development for the nation. Although Deng harbored these views since before the Cultural Revolution, he put them into action in the year 1978, which heralded a new wave of reforms – mainly economic reforms – in China. The first phase of the reforms (late 1970s to early 1980s) concentrated on agriculture, foreign investment and entrepreneurship, while the second (late 1980s to early 1990s) focused on privatization and creating a level playing field for all the players in the economy. This led to a rapid growth of the economy which was stagnated in the erstwhile socialistic setup.
While the GDP grew at a sustained rate of around 9.5 percent from 1978 to 2009, the per capita GDP also grew at a similar pace as the population growth was tightly controlled by the ‘one-child’ policy in China. The graph in Chart 1 shows the trends in the growth of the three factors.
Chart 1: Comparative analysis of growth in GDP, population and per capita GDP
This unprecedented growth, fuelled mainly by exports, has placed China in the spotlight in the international economic order, which faces major uncertainties given the condition of the largest economies in the world, the United States of America, and more so of the nature of its debt. Much of this debt is owned by China, the second largest economy as of today, making its future as uncertain as that of the US. Hence, it is interesting to investigate the future of the Chinese economy and the factors that could impact it the most. For this purpose, a PEST analysis of the Chinese economy in 2025 has been described in this article. Since these aspects (Political, Economic, Social and Technological) are interrelated, the PEST analysis has been carried out by assessing the impacts of two of the most dominant phenomena that are occurring or expected to occur in China by 2025.
1. Increase in the GDP per capita
The tremendous pace of growth in China has caused the per-capita GDP to shoot up from as low as USD 155 in 1978 to USD 3744 in 2009. The intensity of this increase can be appreciated by looking at the graph of GDP per capita over the years (Chart 1). While this increase has caused the standard of living of the Chinese populace to increase manifold, it has also reduced the competitiveness of China’s exports. This is because the main factor which led to China becoming a hub for carrying out standardized processes such as manufacturing is the relative difference in wages of the Chinese workers to that of the workers in the developed countries. This activity known as ‘wage arbitrage’ is successful only as long as the cost of production (including the risk of operating in a foreign country) and transportation of the goods to the markets is lesser than producing the same goods in the home country. Once a country moves from being a low-income economy to a mid-income economy, the possibilities of a wage arbitrage disappear and companies find it more profitable to move out of the economy and operate elsewhere.
Economic impact: China, which is a manufacturing hub, faces this problem due to a sharp increase in the wages of its workers. While some companies have already shifted bases from China to other low-wage countries including India, Vietnam and the Philippines, this is expected to increase in the future when China completely transitions to being a mid-income economy. This would result in many of the workers in the export-oriented industries being rendered unemployed.
Social impact: The workers thus made unemployed would resort either to illegal activities to sustain their lives or protest for a dole to be meted out to them. In either of the scenarios, the government would be hard-pressed to control the problems caused. The government may try to curb unemployment by employing the labor force for infrastructure development of the nation, but even this is more of a band-aid solution than a permanent fix.
Political impact: An increase in the need for social security would have the Chinese government face more ‘incidents’ (read protests), asking for more involvement of the people in the decision-making process i.e. a democratic form of government. Thus the repressed economy which has hitherto been kept satisfied through a fast growing economy would be more difficult to be appeased when the growth slows down.
Technological impact: A fall in the competitiveness for wage arbitrage means that China (or any other economy with a similar model) would have to provide more value for the price it quotes for its products and services. This can only be achieved if the economy upgrades the quality of its products and services, through innovation. Thus, with an increasing per capita GDP, China will be moving towards innovations in products and processes to improve its competitiveness.
2. Ageing population
After the implementation of the one child policy in China, the population growth was drastically reduced. By this measure, the job of the government to provide better living conditions for its populace was made much easier. This was due to the fact that in its early days, China had scarcity of funds to be used for providing healthcare, education and infrastructure to the people and a rapidly growing population could have easily overburdened the reserves.
This move led to changes in the demographic structure where consumption fell sharply due to a decrease in the dependent population and the economy had an investment-led growth due to the move towards savings. But as the economy matures, the number of people in the later stage in their lives increases and the consumption goes up giving rise to a consumption-led growth for the economy. This growth is sustainable only as long as there are young people in the economy who are able and willing to work. But with a one-child policy, this would be difficult as the population matures at an accelerated rate. This phenomenon can be seen through the age-pyramids shown in Chart 2.
Chart 2: Age-pyramids of the population of China through the years
Economic impact: The rise in the number of dependents strains the economy as there are increasingly fewer working age people to support them. This is also known as the "four-two-one" problem; which means that with a one child policy, when the child comes of age, he or she has to support two parents and four grandparents. Thus, if the state welfare system fails and children are unable to care for their elders, then these generations would face extreme hardships to sustain their lives.
Social impact: With the one-child policy, the parents are more inclined to have a male child who would support them in their old age. This concept is similar to what we see in India, where there is a rule in place against determining the sex of an unborn child. This is done to avoid the cases of female foeticide which were rampant in India. But in China, sex determination is still not banned and hence, the female foeticide still takes place. This has already led to a badly skewed gender ratio, which is worsening by the minute.
Political impact: The one-child policy is strictly enforced by the government in China. This is seen by many as a repressive measure, which encroaches on the human rights of the citizens of a country. If the social tensions caused as an outcome of this policy evoke such feelings in the populace of China, they may protest again the government to remove this policy. The government may find it difficult to deal with such protests and may resort to violence to crack down on the protesters, leading to further discontent among the people. This would lead to a vicious circle where the discontent among the people is aggravated by the repressive regime.
Another issue is that on an ageing population which would need more social security entailing more government spending. For the government, making such lasting provisions for social security, in the world of an increasing life expectancy (shown by a death rate lower than the birth rate – in Chart 3 – and increasing medical innovations), would mean a large and sustained investment, which it may not be in a position to bear. This would lead to protests from the older section of society, which would form a large part (around 20 percent) of the total population by 2025.
Chart 3: Trends in birth and death rates
Technological impact: Since there are more elderly people in the Chinese economy post-2025, there will be an increased need for healthcare facilities. Also, there have been many outbreaks of infectious diseases in China, such as the outbreak of SARS and Bird-Flu. To cater to these needs there will be a host of innovations taking place in the area of medicines by the Chinese.
The largest problems faced by China in the years to come would be due to the changes in its demography, which would be counterproductive to its present core competence of manpower. This would herald a new era in the social and political structure of the nation.
Thus it can be said that although China, by 2025 will be a powerhouse in terms of the GDP, given its rapid growth, it will face such tough challenges that will not only be difficult for the government to resolve, but some that would put to test the very basis on which the government operates and the economy is flourishing.
This article has been authored by Shashank Vijay Mahale from NMIMS, Mumbai.