Foreign Policy Essay

The Foreign Policy Essay: Will China’s Economy Dominate the 21st Century?

By David Dollar
Sunday, January 4, 2015, 10:00 AM

Editor’s Note: China’s huge population and spectacular economic growth since the 1980s at first gave rise to fears, and now a sense of inevitability, that China will surpass the United States in the 21st century. Beyond the loss of U.S. dominance, China remains authoritarian, making the prospect of its rise worrisome. David Dollar, my colleague at Brookings, challenges this gloomy consensus, pointing out that China’s authoritarianism might stop it from moving to the next economic level. 

***

In the first decade of this century, China’s economy grew from one-eighth the size of the U.S. economy to more than one-half. China’s economy is clearly slowing down from the torrid 10% growth rate of that decade. Its target for 2015 is likely to be 7% growth. Even at that lower rate, China will surpass the United States as the largest economy in about a decade and by the middle of the century will be twice as large. However, there is nothing inevitable about these developments. History is full of examples of countries that have grown very well for a period, only to have their growth rates slow sharply or even fall to zero.

Dollar photo with borderThere are any number of reasons why China’s growth may falter. After years of dependence on exports and investment for growth, the country is now trying to carry out a difficult set of structural reforms in order to transform the economy to rely more on consumption for demand and on innovation for production. It also faces challenges of environmental degradation that will be expensive to clean up. And its demographic challenges are unique, as its labor force has already peaked and its population will shrink after 2030. But one of the most intriguing potential constraints on growth concerns political institutions.

In their book Why Nations Fail, Daron Acemoglu and James A. Robinson make a compelling case that authoritarian countries can grow well for a while, but that democratic political institutions are necessary to spur the kind of innovation that takes societies to high income:

Our research on national economies throughout world history shows that long-term economic growth, while indeed based on technological innovation, only sustains itself in the presence of democratic political institutions that provide people with incentives to innovate. China may continue to grow in the near term, but the limited rights it affords its citizens places major restrictions on the country’s longer-term possibilities for prosperity.

The country still lacks an independent judiciary and an independent media. Entrepreneurs have been jailed for dubious reasons -- not coincidentally when they went against businesses with stronger political backing. Many key economic decisions are still made by party elites who can change the CEOs of its largest companies on a whim.

There will be limits on how much innovation such a system can generate, even if China keeps growing this decade. For all its changes, China still has what we term “extractive” political institutions, those that direct resources away from the people and toward the state and a small number of its elites…By their nature, extractive states are against the kind of innovation that leads to widespread prosperity: this kind of change threatens the hold on political and economic power that elites in such states fight to maintain.

Cross-country evidence for this view comes from the fact that there are no authoritarian countries that have reached 50% of U.S. per capita income. The figure below shows Freedom House’s index of civil liberties for 149 countries in 2011. Freedom House rates countries in terms of freedom of the press and association, independence of the judiciary, strength of the rule of law—where “1” is completely free and “7” is a complete lack of civil freedoms. China is rated as a “6” on their scale. No countries rated “5,” “6,” or “7” have reached half of U.S. per capita income. Singapore is a bit of an exception as a “4” country with per capita GDP (gross domestic product) close to the United States. But as a “4,” it is not an authoritarian country. One caveat: I have taken out the oil-rich states, which tend to have high income and poor civil liberties. But these economies are not highly productive ones, they just happen to sit on huge amounts of oil per capita. It is very striking that all of the economies that have gotten close to U.S. productivity levels are “1”s and “2”s on the Freedom House scale.

Dollar-Lawfare-Figure 1

A final point concerns demographics. The United Nations projects that China’s population will peak in 2030 and decline by 40% over the rest of the century. It is difficult to grow well with a shrinking population and labor force because the inevitable adjustments that every economy goes through are easier if the labor force is growing. The United States is projected to have growing population throughout the century because of immigration. By the end of the century China’s population differential over the United States will shrink from more than 4:1 today to about 2:1. Thus, one plausible possibility is that China will surpass the United States as the biggest economy in the near future, but that the United States will reemerge as the biggest economy later in the century.

Obviously, thinking ahead many decades is highly speculative. China may have a democratic political transformation that would support its continued growth to high income. Or, an authoritarian China may see its growth rate fall sharply and its relative position in the global economy stagnate or decline. Recent trends suggest that China will be the largest economy for most of this century, but it is naïve to simply extrapolate those recent trends forward.

***

David Dollar is a senior fellow in the John L. Thornton China Center at the Brookings Institution. From 2009 to 2013, Dollar was the U.S. Treasury Department’s economic and financial emissary to China. Previously, he worked at the World Bank for more than 20 years, serving as country director for China and Mongolia from 2004 to 2009.