Sustainability in terms of the economy is the ability of an economy to support a defined level of economic production indefinitely. Economic development is a wider concept than economic growth. Development reflects social and economic progress and requires economic growth. Growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development. This is a key factor to consider in evaluating economic conditions in China, as it can be seen to have one but not the other.
China’s growth could be seen as unsustainable as many state monopolies are currently sustained by state support through heavy subsidisation. These companies are not necessarily the most efficient in production, and may also abuse their monopoly power. In fact, due to the power they receive from such heavy subsidies, they are not even incentivised to increase their efficiency, hence productivity is reduced.
In his editorial, Mr Yu (former Chinese monetary policy committee) described a lack of innovation and creativity as the Chinese economy’s “Achilles heel” and lamented the inefficient use of capital, as reflected by the country’s investment rate of more than 50 per cent. These “Zombie companies” are kept alive, preventing new innovation and smaller, perhaps more efficient companies coming through. "Zombie company" is a media term for a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal. An example of this is within the Chinese steel market – extreme oversupply of steel led to ‘dumping’ in international markets (at low prices to wipe out competition), creating huge controversy. This is unsustainable due to the huge opportunity cost to the government associated with the subsidies – there is a misallocation of scarce resources.
However, China is increasingly investing overseas – for example, the Silk Road Train Service through London. This may be a better allocation of these resources, as the investment can make use of the multiplier, and in turn the accelerator. There will be greater profit and an increase in welfare – and lead to significant positive externalities for London.
“China is using up water at an unsustainable rate,” [The Economist – “All dried up”]. Rapid growth and industrialisation considering the inefficiencies in Chinese industry utilises a high proportion of China’s already depleted supply of clean water. Not only this, but pollution of water occurs due to inefficient and unclean farming and industrial methods. Considering China makes up approximately 20% of the population but only has 7% of the world’s fresh water does not bode well for the country’s development. For example, China’s Yellow River played a crucial role in the radical industrialisation of China, and is now lined with thousands of petrochemical plants, resulting in only 16% of the river now being clean water. It is statistically believed that around 300 million people in China drink contaminated water every day, causing approximately 190 million illnesses a year due to it, severely reducing the average life expectancy in China. This shows that the economic development in China is unsustainable, as one of the components of the Human Development Index (HDI), which measures living standards, is life expectancy – and as this is consistently falling with increasing levels of pollution, so is development. Furthermore, the energy industry in China is failing – expansion without water is not possible for the country. Without a sustainable source of energy, China cannot hope to maintain development. China hopes to come across some form of shale-gas revolution as America – however each well for shale-gas requires 15,000 tonnes of water a year to run.
China is increasingly realising that they must increase the efficiency of the way they use water in production, as currently only 40% used in industry is recycled, half as much as in European countries. Furthermore, the government is looking to increase the price of water, as the prices are extremely cheap in comparison to European countries (one tenth of the price). This increase in price will cause firms to evaluate their usage of water and force incentivise to increase efficient use, minimising water wastage. This will maintain a level of development and prevent water from becoming a limiting factor.
As long as China begins to develop the research and development within its industries, its trends in growth could stay persistent. The country’s outward investments are increasingly rising due to emerging industries driving growth for China. For example, Huawei Technologies opened a new training and innovation centre in Sydney in 2015, displaying their open outward investment in their R&D, attempting to develop the quality of their products for consumers and, in doing so, the efficiency of production. This is a way in which they can sustain a rise in living standards and quality of life, both determinants of development. Furthermore, according to the multiplier model, as investment from firms on R&D increases, there will be a ‘multiplied’ effect on Aggregate Demand (AD) as consumer demand for better quality products will rise, which in turn will cause firms to expand even more to react and to handle this and invest further (this is the accelerator effect at work).
There are also negative effects of China’s outward investments. For example, in Africa, although China have contributed to improved infrastructure and economic development, they have shown a lack of interest in pressing for human rights in areas of investment, as European countries might do. Instead, Chinese investment in Africa seems to be motivated solely by the prospects of Chinese economic gains. They are looking for the opportunity to extract raw materials and sell manufactured products to the African market. In addition, many Chinese investments also involve the use of extensive Chinese labour, which creates problems in terms of local unemployment.
In conclusion, “China’s growth model is unsustainable,” according to Mr Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy and an ex-president of the China Society of World Economics. Much of China’s ability to sustain its development depends on its focus of scarce resources in the future, and the extent of the opportunity costs it will come across.
Written by Omkar Dixit