China’s enormous challenge and its non-obvious solution
China is like a rat on a treadmill, spinning faster and faster just to keep up. China currently has 70 million landless peasants and an economy that is 70% dependent on exports. To maintain relative domestic peace and contain unemployment growth, China needs 7% GDP growth annually — at a minimum. These are problems of great magnitude for a nation that still numbers 800 million farmers, among whom over half a billion people still subsist on $1000-2000 per year. China may have a trillion dollars in foreign exchange reserves, but that is because they haven’t figured out yet how to create a broad-based domestic economy, says Irwin Stelzer:
the Chinese regime’s top priority is to stay in power. That means providing jobs for the 300m farmers expected to migrate to the cities in the next two decades, which in turn means the government cannot allow the yuan to rise and cut sharply into exports…
The Chinese are well aware that their policy of accumulating foreign currency creates problems for them, and that they would be better off if domestic demand grew so as to reduce their need to export. But they cannot figure out how to get from here to there — how to achieve that goal without creating huge unemployment during the transition from an export-led to a more balanced economy.
So far the Chinese government’s default solution is to “grow, grow, grow.” How long this can be kept up is anyone’s guess. They’re at 20 years and counting now of GDP growth averaging over 9% — an achievement unparalleled in modern economic history.
UPDATE
We note that the US faced similar issues around the time of WWI. As we have written, farm employment was 42% at the time of WWI, and had declined to a quarter of the work force by the end of the Roaring ’20’s. The WWI song, How ‘Ya Gonna Keep ‘Em Down on the Farm (After They’ve Seen Paree), was not just a clever ditty. (Audio here.) It reflected the economic reality of the time, the reality that the US faced a century ago and China faces today. We just hope it ends better this time than it did for the world at the end of last century’s Roaring ’20’s.