This is a re-post from this website: https://medium.com/open-source-futures/china-more-downside-risks-for-internal-domestic-issues-5295f91475e1
The country to watch for 2040 is China. Although this might be obvious, there is more to this than meets the eye.
The obvious notion that China is the country to watch comes from its vast size. Still the world’s largest population with a large industrial base and a consumer population - whatever China’s consumers and manufacturers decide to do will exert a tremendous influence on the world. Any major issue or problem with the world has a Chinese dimension. Whatever China’s views are, various countries have to respond to it, whether they like it or not.
Unfavourable Demographics
The area that we can discuss most confidently with the least uncertainty is in the area of demographics. China’s population is ageing, and is ageing fast. By 2040, China’s population of 65+ will increase to 340 million, in a population of about 1.4 billion people. This would mean that the dependency ratio - the number of people needed to support the young and the old, will decrease dramatically - a smaller and smaller number of people at working age will be supporting dependants. This realisation alone should be evoke a pause in the narrative of an ever growing and ever more assertive China. China’s growth path will be limited. The analogy would be Japan today. Japan is an advanced, ageing country, already managing the impact of an aged society. It is still cutting-edge in various areas of technology and culture, but its GDP growth is limited - it is barely growing in overall terms, but its GDP per capita is increasing nonetheless. Japan’s situation is unique in the sense of how it has eschewed military development and focused on other areas of scientific and technological development, and even then, there are limits to how it can grow. Japan’s route to economic health is continued innovation - more automation in more areas of the economy; a continued commitment to excellence in service and other industries. Japan is undoubtedly an economic power - Tokyo is an important node in the global financial system, and Japan still has geopolitical heft, at least in economic and financial matters.
This report shows China's demographic trajectory: https://globalcoalitiononaging.com/wp-content/uploads/2019/01/China%E2%80%99s-Demographic-Outlook.pdf
So what happens when China ages? China’s public finances will deteriorate, as more and more people retire and less and less number of people join the workforce. There will have to be difficult reforms to the way China finances those pensions - usually to do with reducing pension payouts, or gradually increase the retirement age, or through a combination of both measures. There are other ways too, such as increasing taxes on a smaller working population, or other ways of increasing revenue. An even larger suite of measures could be to convert retirement payout schemes from a defined benefit system (as the current pension scheme goes) to a defined contribution scheme, where the state forces individuals to put a portion of wages into a separate retirement pot, as several countries have done.
(page screenshot from China 2049, edited by David Dollar, Yiping Huang, and Yang Yao: https://www.brookings.edu/book/china-2049/)
The next challenge would then be, paying for healthcare. China’s healthcare system had undergone reforms, and in 2018, created China National Healthcare Security Administration, providing citizens with basic healthcare insurance. I guess the next bound of reforms will have to do with long-term care and long-term care insurance.
Even with all these measures in place, the ageing population will certainly limit China’s broader ambitions. More resources will have to go into the construction of healthcare facilities, the training of medical staff, and the prioritisation of healthcare and social care. This does not mean that the country would spend less money on defence or be less militarist; Japan today certainly not a young country, is undergoing a phase of military modernisation, and re-adapting their previous, ‘helicopter destroyers’ as aircraft carriers, being refurbished to take on F-35B air wings. An ageing China would still have much resources to expend on their military; it would just be that there would be constraints of the pace of growth.
An Increasingly Novelty-Averse Culture
There are other implications for an ageing society. As the society ages, there might be a lower acceptance for risk - there might be less appetite for large social reform and change. This would mean that ageing societies might be less accepting of social diversity as they might be had they been younger. There are social suggestions for how older people might be more inclined towards social homophily - people more at ease with people more like themselves a lot more than otherwise. The flip side could also be that when risks and dangers crop up, there might be a tendency to want to take disproportionate effort to reduce the impact of the risks. This might end up causing more crises than otherwise; a society that wishes to eliminate threats - security or otherwise, might create more tensions.
The argument that China can avoid this ageing trap through sheer technological advancements is a bit of a wishful thinking. Neither the US nor Europe nor Japan - have demonstrated the ability to increase their productivity rate, and they are at the productivity frontier. The development of technology by itself is only one component of a larger socio-technical system that can leverage the various developments, together with a business and the regulatory process to accompany. Will Chinese societies be able to integrate technologies into their lives? Although it looks like Chinese society is technologically savvy and adapt to new technologies, the same might not be the case 20 years later when the society ages and gets comfortable. Getting companies to adopt new technologies is not a certain thing; companies will have to unlearn current process and take on new ones. Putting automation and digitalisation into processes is not trivial. There are also going to be cultural resistance to the introduction of new processes, especially when these processes will come about during the time of China’s zenith. Processes in the time of success will be difficult to change - owing to the inertia of success.
Climate Crises
The socio-economic challenges are only one facet of the issue. There might be even more serious issues coming from climate change. China could be impact on several fronts’ in the north, desertification and drought are potential dangers; in the south, typhoon season might change to become erratic. When food production is threatened, there are serious threats to the political authorities. No amount of surveillance is going to deter people from protesting when food supplies are threatened. I might explore this in the future - but the threats are clear enough.
China's water crisis: https://chinadialogue.net/en/climate/10583-china-is-heading-towards-a-water-crisis-will-government-changes-help/
Impact of climate change to 2030 for China (2009 DNI report): https://www.dni.gov/files/documents/climate2030_china.pdf
An Inevitable Plateau?
What all these means is that the socio-economic prospects for China’s future are not all sunny and optimistic as economic reports might suggest. There are instead, real challenges in the socio-economic and environmental arenas, which might point to a plateau in long-term growth prospects. This might mean a China that gets ‘stuck’ in a low-growth scenario at say something like US$25,000-US$30,000 per capita range, rather than an ever-increasing growth towards $30,000 and beyond, and that it might attain at around 2040. Even at this level, the economy would already be twice or three times that of the United States; it would be an amazing feat, but one that would have to struggle to keep at an even keel - keeping the socio-economic issues at bay and addressing the environmental degradation that might have already occurred.
I’ve discussed the gravity of the socio-economic crisis that China will be facing in the next few decades and how that might affect the pace of change in society and how that might impact politics. The environmental crises will also impact governance and society. For China, there is no linear path to becoming the world’s largest economic and geopolitical power, and that path will be closed if it cannot handle these urgent challenges. We also know that when these environmental crises happen, they do not happen in linear, and predictable ways. They come in the form of big shocks to the system. We don’t know how prepared China’s local and central governance systems are in coping with these shocks, and whether they will have sufficient political capital to meet it in that time.
What these all means for today
Knowing that there are urgent challenges facing China’s leaders today at the domestic front, the current positioning as of June 2020 presents a somewhat positive environment for China. China has gotten the pandemic under control while the rest of the world has only begun re-opening. It is able to leap-ahead in jumpstarting economic growth. It is able to enact laws while the rest of the world is distracted by their respective domestic situations. It is able to exert its will on the countries in its regional periphery; this is a golden opportunity to make claims and assert them while the periphery is in relative weakness. If it can, it will spend the 2020s consolidating on the current gains, both geopolitically and in global institutions. It will change the ‘facts on the ground’, making sure that the ‘facts’ can be defended, or bargained away at a later time for some geopolitical value when circumstances change for China.
This is why the 2020s are the last gasp of strategic window for China’s leaders before they begin to grasp with the gravity of their socio-economic and environmental challenges. We should hope that China’s leaders are secure and can act rationally on these. The alternative of splintering and a civil war in China due to the loss of confidence in central authorities would present a massive humanitarian disaster to the region.