Despite having a shrinking workforce while being the world’s top manufacturer and exporter, China’s youth unemployment challenges share similarities with ours.
The economies of China and South Africa both require profound restructuring. Yet China’s leaders seem as disinclined as ours to provide the policy pivots required.
China’s four decades of extraordinary growth relied on an economic model whose vibrancy has been receding. Its ultra competitiveness at value-added exporting has suffered from eroding labour-cost advantages and from Beijing challenging the global order favoured by the nations which are its top customers.
Becoming the world’s largest exporter allowed China to sustain rapid growth while simultaneously maintaining high household savings. This should have led to their economy becoming more balanced in favour of domestic consumption.
China’s household consumption as a percentage of GDP is still less than 40% whereas in the rest of Asia and Europe it is above 50%. In the US it is nearly 70%.
China’s low household consumption reflects a high savings rate. This has helped fund enormous investments in infrastructure and real estate which, given a contracting and rapidly ageing workforce amid slowing economic growth, now seem excessive. That the debt incurred for such initiatives is mostly owed to Chinese savers increases the risk that their policy makers will continually resist painful, yet necessary, policy shifts.
Tying the funding of local governments to real estate development is now threatened by slower economic growth and an urban birth rate of 1.1 versus the 2.1 rate required for population stability. Even the rural rate is only 1.5. Meanwhile, the torrent pace of rural-urban migration has slowed markedly while urban-rural migration is now growing.
Rather than restructuring China’s economy, President Xi has prioritised reshaping the rules-based global order to accommodate autocratic regimes. As recently as early last year, he could tell himself that his approach to the pandemic and his ‘no limits’ alignment with his ‘best friend’, Russia’s President Putin, were prudent.
Whereas China’s youth unemployment has been trending higher and it now exceeds 20%, which includes many college graduates, ours is entrenched at more than three times this level. As economic forecasts suggest that South Africa’s economic growth rate will continue to struggle to keep up with population growth, we should better appreciate how China’s youth unemployment challenges are relevant to ours.
Even if China meets or exceeds its 5% growth target for 2023, a quite significant portion of school leavers, including college graduates, won’t find jobsdespite ongoing workforce shrinkage. This highlights how neither strong economic growth nor rising education outcomes ensures robust employment.
In the late 1970s, nearly 90% of Chinese were extremely poor versus less than 1% today. Their economic growth relied on value-added exporting which exploited their abundance of low-skilled labour. To escape rampant poverty, they pivoted from Soviet-styled economics to pursue broad prosperity via the Japanese export-led growth model.
Whether in South Africa today or China in the 1970s, broad upliftment follows from creating jobs that add value to products and services destined for markets with ample purchasing power. There are small clusters of affluent consumers in all parts of the world but the large clusters are concentrated in the West. Asia’s economic giants, China and Japan, maintain high savings rates and trade surpluses.
China’s savings rate, growth rate and educational outcomes are all much more favourable than ours. Yet despite its population contracting, China’s youth unemployment is rising. How does this make sense?
Economic development is a relativelynew discipline which was inspired by biological insights. Humans begin life with very little innate knowledge. We spend our first two decades learning and the next four or five being productive while adjusting to our changing surroundings. Asia’s many high-growth economies all imported skills and knowledge to accelerate their productivity and competitiveness. This resembles juvenile and early-adult development.
Redistribution-reliant patronage model
The ANC de-emphasises learning, productivity and competing internationally, as its political support relies on a redistribution-reliant patronage model. The ANC’s political economics also provokes much corruption whichmust be purged – yet this won’t fix the economy. China’s most robust growth years were accompanied by rampant corruption.
ANC policies have provoked the world’s most severe youth unemployment crisis. A majority of South Africa’s next generation will never become productive members of society. Other countries would be declaring a five-alarm emergency. We debate sub-subsistence grants.
Biological advances require mutations being subjected to survival pressures. Humans generally have become too economically productive and too altruistic for people to starve in large numbers – without abundant government complicity. Rather, diffusion of successful economic mutations, better known as innovations, create waves of economic survival pressures. Such unrelenting forces make global integration difficult but necessary for countries, companies and workers.
Insufficient integration provokes dangers resembling those from failing to keep up with the herd. Yet adequate global economic integration, as measured by having a significant portion of young adults working in global supply chains, conflicts with redistribution-reliant patronage.
Economic development progresses through creating virtuous cycles that resemble each generation seeking better prospects for their offspring. This is mostly about balancing consumption and investment while adopting innovations to continuallyincrease productivity. In the past, isolated countries could achieve virtuous cycles but their progress would be, at best, exceedingly slow.
Japan discovered how to rapidly accelerate progress through adding value to exports for affluent markets. Then their investment strategies created bubbles which choked their growth for a generation. China’s path looks increasingly similar.
Four key spheres
Our political economics needs to align four key spheres: economic development; social justice; commercial economics; and geopolitics. The four spheres are amenable to being aligned. While we are fortunate to have business leaders who are highly competent at the toughest of the four spheres, commercial economics, our political leaders have thoroughly botched the other three.
The ANC’s take on geopolitics was ill-conceived a half century ago and it shows few signs of having been updated. As our ruling elites are subservient to the patronage network they created, they use ‘economic development’ as a euphemism for ‘redistribution’. The ANC makes this politically persuasive by weaponising social justice narratives around race and inequality. Yet South Africa has become the world’s most unequal nation – notwithstanding there now being more high-income blacks than whites. We are also expected to understand that ANC fat cats ‘must eat’ while our deeply entrenched youth unemployment crisis has devastated the next generation’s prospects.
Our business leaders achieved some constructive influence by advocating for investment-led growth. However, such investments were never going to meaningfully mitigate our massive unemployment as the customers being targeted were South Africans and our economy’s binding constraint is access to adequate purchasing power.
While China’s growth continues to rely on its competitiveness at value-added exporting to maintain a massive trade surplus, this does not assure employment of each year’s school leavers – nor does academic success or even a shrinking workforce amid strong growth.
China’s phenomenal rise through value-added exporting always needed to be followed by a transition to domestic consumption accounting for a rising share of GDP. China isn’t getting this right due to over investing in real estate, infrastructure and its Belt and Road initiative.
Our domestic consumer demand is on a wobbly trajectory due to low worker productivity combined with localisation policies and high household reliance on expensive consumer debt. This is a recipe for entrenching enormous unemployment and poverty. Like China in the seventies, we will have to find paths to integrate large numbers of low-skilled workers into the global economy.
The reversal of South Africa’s decline will be led by entrepreneurs discovering job-creating export opportunities that the nay-sayers insist don’t exist. The rest of us should more thoroughly understand how our economic challenges relate to what has and hasn’t worked elsewhere.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
If you like what you have just read, support the Daily Friend