The question of whether China can, or should, sustain an annual GDP growth rate of around 7% obscures a bigger question: can China innovate sufficiently to continue growing despite mounting environmental constraints?
Based on a discussion among economists at the Boao Forum for Asia last week, the answer is: maybe.
Jeffrey Sachs, director of The Earth Institute at Columbia University, said 7-ish percent was probably right for a country whose per capita income is 25% that of the United States, based on purchasing power parity.
He said a rule of thumb of the past 30 years of development has been that countries playing economic catch-up can count on faster growth the poorer their populations relative to the US, which has enjoyed fairly constant annualised growth of 1.8% for two centuries. Add that factor to China’s working-age population size, and China should be growing around 6 to 7% per annum.
While that formula seems to work for all countries, Sachs said China faces an environmental constraint that is new. The constraint is global, as everyone is beginning to hit physical climate-related boundaries for the first time in modern history. “We’re wrecking the planet,” Sachs said.
He said future growth worldwide will depend on the extent to which governments and societies engage in deep, structural reform to make economic growth sustainable and environmentally friendly. “It can’t just be about branding or a label or a gimmick,” he said, adding that no government is willing to make a first move. The US is neurotically drilling new wells to boost its economy and political power; China and India argue they are still poor and must make economic development the priority.
But Sachs said he is optimistic that China will become a leader when it comes to sustainable technology. “China has 2,000 years of technological innovation,” he said.
Other economists are split on whether China will have the capacity to continue to grow at the current pace, or by what means.
Fan Gang, director at the National Economic Research Institute in Beijing, said China, India and Southeast Asia will continue to grow around 5% to 7% per annum for the foreseeable future. In China’s case, although the labour force has peaked, it is better educated and therefore more productive. Disagreeing with projections that China’s growth rate should slow further, Fan said innovation will help it maintain growth momentum.
Zhang Weiying, professor at Peking University’s National School of Development, cautioned that to boost innovation will require substantial changes, such as enhancing individual freedom and the rule of law.
Zhang argued that red tape is becoming a hindrance to business. “We can’t have businesspeople spending too much time trying to guess government policy. Steve Jobs never thought about monetary policy.” Instead the government needs to do more to allow entrepreneurs to focus on creating value and making markets.
He added that when a businessperson makes a mistake, it could result in bankruptcy; when a minister makes a mistake, nothing is ever admitted, and the remedy is usually more government actions meant to cover up the original problem.
Criticised as naïve by a member of the audience, Zhang said, “I know it’s not a perfect world, but we need to have ideals.”
Fan expressed concern that businesspeople aren’t focusing on the environmental issues raised by Sachs. “Everyone here is talking about Internet this and Internet that, and I’m sure they’ll make a lot of money.” But he noted that some people are getting rich by selling better solar panels and other renewable energy products. “There are opportunities to make money in macro-green as well as the Internet,” he said.
Sachs said environmental issues will not get in the way of China’s shift to a more consumption-oriented economy, but whether the planet can handle a vast expansion of American-like habits will depend on whether governments globally take the lead in painful structural changes.
“If we and China and India stick to an economic model based on fossil fuels, there will be significant global destabilisation,” he said. “It’s already happening in weaker places like Syria, Iraq and Yemen, which are suffering from chronic drought and hunger.”
Growth has to be structurally different, so that within a few decades the world uses electric vehicles and ends carbon-based emissions. “This must become part of the vision in China’s 13th five-year plan,” he said. “The US has no plan, its policy is lost in its special interests.” While China has a long way to go, Sachs said, “At least it has a plan.”