In a brief book, there are inevitably important topics that cannot be covered. In this book, there are three such topics that stand out—China, demographics, and energy technology. The book does not focus on the dramatically changed role of China in the global economy over the past forty years. Rather, China’s role in the global economy is important and will be more important in the years ahead.
Related to China’s role in the global economy is the 2022 Russia–Ukraine war. While it’s too early to fully understand the complete set of economic, diplomatic, and strategic implications, early returns suggest global supply chains will be impacted, perhaps on a long-term basis. Businesses in Europe, United Kingdom, and North America will be reconsidering alternative sources of skill, business partnerships, and manufacturing locations. Such considerations are expensive and have long-term implications. Undoubtedly, any transformation will mean the deployment of new tangible capital and new advanced digital technology.
In addition, while demographics are clearly very important and variable over long time horizons, it is beyond the scope of the current book to consider the impact in detail (see Goodhart and Pradhan 2020). Similarly, energy technology has played a vital role in each era, migrating from water to steam to electricity to fossil fuels to nonrenewables. Here is a summary of each topic.
China as the Next Global Hegemon
The opportunity in the period ahead is not lost on China’s political leaders. Despite notions in the west that only democracy can promote innovation and creativity, China is challenging such thinking. As a strategic competitor, China is formidable. Weinstein (2022) makes the case that the Chinese government is attempting to create a system that promotes linkage between state-owned enterprises (SOEs) and private enterprises. Understanding the limitations facing the SOEs, China’s leadership has focused on private sector innovation with government funding and research incentives enhancing innovation potential. With Chinese universities, private sector firms are having success, discrediting the notion that only democratic nations can successfully innovate. Nonetheless, China’s political leaders appear to have recognized the need to combine the innovative aspects of capitalism with more rigid, traditional socialist features.
WeChat might be the best example of Chinese technological innovation. Weinstein (2022) writes, “Individuals are able to do almost anything using the app, from ordering food and paying bills to filing for divorce and applying for visas. The proliferation of WeChat throughout Chinese society—spanning generations and across the urban-rural divide—is a monumental feat and demonstrates WeChat’s adaptability.” WeChat’s success has spawned the creation of many of the world’s leading fintech companies, including Ant Financial and JD Finance.
The Chinese effort to build smarter cities is another illustration of the ability to derive innovative capabilities from preexisting technologies. After the 2008 launch of its Smarter Planet initiative, IBM helped to advance the Smarter Planet concept in China. Huawei, the Chinese Academy of Sciences, and the State Grid Corporation have all successfully deployed a wide range of Smarter Planet solutions. The Smarter Planet investments have created a domestic market opportunity of more than a trillion dollars with the three Chinese entities dominating Smarter Planet patents. However, as Weinstein observes, Smarter Planet applications in China have gone much further than those deployed elsewhere by incorporating surveillance and monitoring technologies into the broader ecosystem.
Despite fintech and Smarter Planet success, China continues to struggle to innovate in areas such as semiconductor technology and the needed complex and expensive chip manufacturing equipment. In addition, China also relies on imports for many strategically important technologies that it’s unable to produce domestically, including gas turbines, high-pressure piston pumps, steel for high-end bearings, photolithography machines, and core industrial software.
China has demonstrated a capacity to innovate and compete on a global scale, but its capacity has not yet proliferated across all sectors. Limitations notwithstanding, China has developed a system through which private sector firms, universities, and government institutes learn from foreign counterparts and adapt to fill innovation gaps. It’s very possible that in the decades ahead, Chinese political leaders will succeed in drawing on free market principles without surrendering control of the private sector while deploying the innovation necessary for continued rapid growth.1
Demographic Slowdown Constrains Growth
Economic growth is the product of labor force growth and productivity growth. With labor force growth limited by developed nation population growth, productivity growth takes on increased importance, with some automation necessary to meet growing labor demand.
In the United States, for example, the most recent population estimates from the U.S. Census Bureau indicate that population growth from 2010 to 2020 was the second lowest in the nation’s history, 0.7 percent per year. Among all 50 states, 37 grew more slowly in the 2010s than in the previous decade, and three states lost population. The largest number of such states since the 1980s. The decade brought declines in the number of births, increases in the number of deaths, and lower immigration rates. Immigration was reduced due to federal restrictions that led to a decline in the noncitizen foreign-born population. In the 12 months, from mid-2020 to mid-2021, the U.S. population grew at an unprecedented low of just 0.1 percent.
The most recent census also found for the first time, there was a decade-long loss in the number of white Americans who do not identify with other racial and ethnic groups. All the U.S. population growth over the decade is attributable to people of color. Those identifying as Latino or Hispanic, Black, Asian American, Native Hawaiian or Pacific Islander, Native American, and as two or more races now comprise more than 40 percent of the U.S. population. The nation’s under-18 cohort experienced an absolute decline of more than one million. The decline was the result of a loss in the white youth population that was not fully offset by gains in other racial and ethnic groups. As a result, white Americans now comprise less than half of the nation’s under-age-18 population.
The United States is not alone in experiencing slow population and labor force growth. Very low birth rates in Europe and parts of eastern Asia, and the resultant population decrease, have received considerable attention. In the 2010 decade, the European Union’s population growth was 0.1 percent per year. Labor force shortages are widely recognized, particularly among service occupations.
Asia and Europe are home to some of the world’s oldest populations, those aged 65 and above. At 28 percent, Japan has the oldest population followed by Italy at 23 percent. Finland, Portugal, and Greece complete the top five at just under 22 percent. Southern Europe, which includes such countries as Croatia, Greece, Italy, Malta, Portugal, Serbia, Slovenia, and Spain, is the oldest region in the world with 21 percent of the population aged 65 and above.
However, the world’s most populist nations are not among the oldest. Twelve percent of China’s population is aged 65 or above, 16 percent of the United States is in the older age group, and 6 percent in India is in the older cohort (www.prb.org/resources/global-aging-and-the-demographic-divide/).
Global Warming and the Transformation to Renewable Energy
Finally, each industrial revolution has brought with it a new energy technology. From waterpower, to steam, to electricity, to fossil fuels, each has played a primary role in successive revolutions. However, the consequences of these earlier technologies, most importantly fossil fuels, have been massive climate change and global warming. It’s very likely that renewable energy sources will play an important role in the period ahead with fossil fuels diminishing in importance and renewable sources, over the long term, reducing energy costs. However, the transformation will not be easy or quick.
Recent work by Fries (2021) outlines the challenges, actions, and policies that will be necessary. Fries’ perspective on the renewable energy transformation ahead is through the lens of the policy and the investment decisions to be taken by governments, businesses, and households. But changing the current fossil-fuel-based system to low-carbon alternatives is among the most difficult challenges the global community currently faces.
McKinsey Global Institute (2022) estimates that tangible capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 will be approximately $275 trillion, or $9.2 trillion per year, an annual increase of $3.5 trillion per year from current spending levels.
Fries writes: “Much as an ‘industrial enlightenment’ of scientific knowledge and its engineering application enlivened the first and second industrial revolutions and created modern energy systems, the awakening of low-carbon technologies today emerges from investments in knowledge and new capabilities”. In the advanced industrialized nations, including China and Russia, the shift to renewable energy requires almost every business and household to invest in low-carbon alternatives with suppliers transforming energy production.
While there is broad agreement in economics on (1) using emissions pricing to internalize environmental externalities and (2) government policy support for research and development (R&D), in practice, achieving the levels and scope of adequate emissions pricing has been challenging. Incomplete markets, adverse distributional impacts, arbitrary political shifts, and time inconsistencies in policy implementation have all contributed to unsuccessful policy transformation.
In Fries view, markets are unlikely to deliver the needed change for three reasons.
• Knowledge spillovers arise not only from R&D activities but also from deploying and using low-carbon technologies—learning from experience.
• Some low-carbon technologies benefit from substantial scale economies, especially those that can be mass produced with potential for wide deployment across sectors and countries.
• At the core of the transformation are government-designed and government-regulated markets for electric power.
Fries recommends a focus on not only emissions pricing but also nonprice policy interventions such as market-creating and industry-supporting policies for low-carbon technologies, especially during their early deployment in initial markets. Adapting government-designed energy markets, their regulations and infrastructures to low-carbon alternatives is essential.
1 Lee (2018) imagines China and the United States forming a new AI duopoly with workers finding new ways of working along with Chinese and American political leaders struggling with the changing economic landscape.