Towards a Sustainable Future: Case of China’s Economic Transformation

By Zhengian Huang and Daniel Jeong-Dae Lee
BANGKOK, Aug 13 2019 – The Asia-Pacific region is at a crossroads. The traditional export-oriented, manufacturing-driven growth is facing headwinds from sluggish external demand and rising protectionist trade measures. 

New technologies have increased the likelihood of labour-intensive jobs in the region becoming automated. Meanwhile, many countries have witnessed widening income and opportunity inequalities. Rising environmental risks and climatic disasters add further burdens to the future development agenda.

There is an alternative scenario in which China pursues a holistic approach to structural reforms that achieves innovative, inclusive and sustainable development growth paths simultaneously

Now the questions that most developing countries in the region face are: Can they achieve economic convergence by following the traditional growth path? How can they balance economic growth with social inclusiveness and environmental sustainability?

This article addresses these questions by using China as an example.

China’s economic development is outstanding in terms of pace and scale. Over the last four decades, China’s economy has become the largest in the region, and has transformed from a predominantly agricultural one to an industrial powerhouse, and is now increasingly service-oriented.

However, strains from rapid structural changes have become clearer. Prominent among these are the country’s slowing population growth and labour force expansion, its decelerating productivity growth as available technologies approach the technological frontier, distributional tensions resulting from rising inequality and strains on the carrying capacity of the natural environment.

Economic simulations through 2030 suggest that under the business-as-usual (BAU) scenario, GDP growth would hold up at a rate of around 6 per cent in the short-term but would experience a sharp drop by 2030 as economic efficiency declines. At the same time, urban-rural income gaps as well as inequality within urban and rural areas would remain wide, leaving pockets of poverty.

China’s energy consumption and carbon emissions would continue to rise, failing to meet its commitment to the Paris Agreement (see BAU scenario in figure A, B and C).

 

There is an alternative scenario in which China pursues a holistic approach to structural reforms that achieves innovative, inclusive and sustainable development growth paths simultaneously

Figure: Alternative scenarios for China in 2030
Source: ESCAP, based on DRC-CGE model.
Note: BAU = baseline scenario; ING = innovative growth scenario; ICG = inclusive growth scenario; SSG = sustainable growth scenario; and ALL = innovative, inclusive and sustainable growth scenario.

 

 

However, there is an alternative scenario in which China pursues a holistic approach to structural reforms that achieves innovative, inclusive and sustainable development growth paths simultaneously.

Under this scenario, the country could maintain relatively high rates of economic growth, even as external demand remains sluggish, the labour force shrinks, and capital accumulation slows.

Accelerated urbanization, a rising “middle-class” population and increasing government transfers to optimize the social protection system could narrow rural and urban income disparities.

China’s total energy consumption and carbon emissions could peak in 2025, five years ahead of the timeline for the Paris Agreement, if a new carbon tax is implemented and non-fossil fuel energy assumes a greater share of the energy mix (see ALL scenario in figure A, B and C).

Recent policies and measures show that China is giving more weight to the quality of growth. First, China is pursuing supply-side reforms, focusing on technology and innovation. The country has established objectives to become an “international innovation leader” by 2030.

Second, actions are underway to improve the inclusiveness of economic growth. China has established objectives for eliminating absolute poverty by 2020.

Fiscal transfers to enhance social protection have been increased, while more funds have been deployed for rural infrastructure, agricultural subsidies and discounted loans.

Third, China has taken serious steps to curb pollution while speeding up the transition to clean energy. China aims to get 20 per cent of its energy from renewables by 2030. In late 2017, a carbon emissions trading system was launched in the country.

Such policies should be pursued in an integrated manner in order to reduce trade-offs and maximize synergies. In the Chinese example, policy priorities on technology and innovation could boost growth in GDP but might worsen income inequality, given technology’s effect of favouring capital over labour and favouring skilled over unskilled labour (BAU and ING scenarios in figure A and B).

Policies to reduce carbon emissions would be more effective if combined with new technologies and innovation which improves resource efficiency (SSG and ALL scenarios in figure C).

Scenarios on China’s potential policy paths towards a sustainable future shed some light for other developing countries. While a country’s economic growth may inevitably trend down as it matures, the quality of growth will differ significantly depending on the policy choices made.

It’s highly important and urgent for policymakers to switch their mindsets to prioritize policies that support people and the planet. This is not an easy process. Continuous policy efforts are required to balance development between the social, environmental and economic dimensions to ensure long-term prosperity.

 

This article is based on a recent ESCAP report China’s Economic Transformation: Impacts on Asia and the Pacific. Please click here to view it.