Tanweer Akram (Voya Investment Management)

12th International Post Keynesian Conference (Sep 25-Sep 27, 2014)University of Missouri Kansas City (UMKC)Kansas City, Missouri, USA

Bertrand Russell and the Challenges of Contemporary China

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Important Disclaimer

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. Past performance is no guarantee of future results.

Voya Compliance ID # 10534

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Motivation

More than 90 years ago Bertrand Russell wrote The Problem of China (1922).

This presentation will discuss some of the key challenges of contemporary China in light of Russell’s dated but insightful and prescient analysis.

Many of the issues that Russell identified still apply to contemporary China but there are other important issues crucial today that were not topical 90 years ago!

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Russell in China

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Bertrand Russell and China

Among the first major Western philosophers who visited China

Taught at Peking Government University

Published The Problem of China (1922)

Retained an interest in China throughout his life

Corresponded with Chinese leaders, particularly during and after the Sino-Indian war (1962)

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Russell appreciated the importance of China

“Chinese problems, even if they affected no one outside China would be of vast importance, … the entire world will be vitally affected by the development of Chinese affairs … during the next two centuries. This makes it important … that there should be intelligent understanding of the question raised by China, even if, as yet, definitive answers are difficult to give.” (The Problem of China, 1922, p. 3).

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China today is a lot different than during Russell’s visit!

The world’s second largest economy (measured in purchasing-power parity terms)

Important driver of global growth

Vital role in international trade and global manufacturing and supply chain

Strong per capita real income growth and impressive reduction of income poverty since 1980

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China is the world’s second largest economy

Share of Global GDP (PPP-adjusted), %

JPN EURO ZONE BRICs ex CHINA PR CHINA USA and CAN

Sources: IMF World Economic Outlook, Reuters EcoWin

94 96 98 00 02 04 06 08 10 12 14

%

0

10

20

30

40

50

60

70

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Per capita real income in China has increased rapidly

US$, 2005 Prices

China, Real GDP per capita

Source: Reuters EcoWin

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

US$

0

500

1000

1500

2000

2500

3000

3500

4000

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China’s challenges today

Still a lower medium income country

The standard of living remains low for the vast majority of its people

Problems of rebalancing aggregate demand, environmental degradation, and widening social disparities

One party system

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The main problems that Russell identified in 1922

1. The establishment of a stable, orderly and sovereign government

2. The industrialization and modernization of the country’s economy with Chinese control

3. The spread of education

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Industrialization and economic transformation in China

Russell understood that industrialization would be important for China. He believed that Chinese industrialization would occur only under socialism. Even though he thought industrialization is essential, he believed that China would remain a predominantly agrarian country in the foreseeable future.

Indeed, substantial industrialization and modernization did occur after the establishment of the People’s Republic of China. But renewed impetus to strong growth came after the post-Maoist reforms in both agriculture and industry.

China is a now a “mixed economy”, with substantial state ownership and control of the means of production but also with private ownership of capital.

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China has undergone rapid urbanization in recent years

China, Urban population (% of total)

Source: Reuters EcoWin

60 65 70 75 80 85 90 95 00 05 10

%, To

tal Po

pulat

ion

15

20

25

30

35

40

45

50

55

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Challenges for contemporary China that are relevant today but were not topics of the day during Russell’s times

Structural composition of aggregate demand Aging population, low fertility rate, biased sex ratio and

demographic transition Environmental degradation Social disparities Health standards and food safety Banking and finance Elevated real estate prices Energy security

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Both consumption and investment underlie domestic demand growth

China, Sources of Growth

Final Consumption Investment Net Exports Growth

Source: Reuters EcoWin

80 85 90 95 00 05 10

-10

-5

0

5

10

15

20

25

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Consumerism and consumption in China

Consumption in China has risen in conjunction with growth and the rise of real income, even though household consumption as a share of national income remains low and has declined since the early 1990s.

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High investment, fixed asset and infrastructure Spending

Investment has been important driver of growth. Construction of industrial, commercial and residential real estate has boomed. Chinese cities have changed dramatically since Russell’s times!

By 2025, in China Urban population will grow to about 250 million More than 200 Chinese cities shall have more than one million

residents, compared to 35 such cities in Europe 50,000 skyscrapers is expected to be constructed (= 10

Manhattans!) Beijing’s subway (underground metro) system will exceed

1,000 km and the country will be building more subway lines that what the total of Europe’s currently installed subway systems

Impressive skyscrapers!

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China’s population is expected to decline by mid-2030s.

China, Total midyear population

Source: Reuters EcoWin

50 55 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50

Pers

on (b

illion

s)

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

30

China is benefiting from demographic dividend

China, Age dependency ratio (% of working-age population)

Source: Reuters EcoWin

60 65 70 75 80 85 90 95 00 05 10

%

35

40

45

50

55

60

65

70

75

80

85

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Some indicators of human development in China

Indicator of Human Capital Development People’s Republic of China(CHN)

South Korea(KOR)

Japan(JPN)

Life expectancy at birth, years, 201273.7 80.7 83.6

Mean years of schooling, years, 2010 7.5 11.6 11.6

Expected years of schooling, years, 201111.7 17.2 15.3

Maternal mortality rate, death per 100,000 birth, 2010 37 16 5

Physicians, per 1,000 people, 2005-2010 1.4 2.0 2.1

Source: UNDP, Human Development Report 2013

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Progress in health and life expectancy has not been impressive since the beginning of economic reforms

While China continues to make impressive progress in education, scientific and technological capabilities, since the beginning of economic reforms China’s life expectancy gains and health gains have been less impressive.

China will need to investment in public health infrastructure, public health security and insurance, and improve food and water safety standards to improve the health outcomes of its people going forward.

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China’s total CO2 emissions exceeds that of the U.S.

USA and China, Emissions, Carbon Dioxide

China USA

Source: Reuters EcoWin

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Ton

(met

ric) (

billio

ns)

1

2

3

4

5

6

7

8

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But China’s per capita CO2 emissions are still far below that of advanced capitalist economies

2012

Emissions, Carbon Dioxide, Per Capita

Value at 2012

Source: Reuters EcoWin

USA CHN

Tonn

es

0

5

10

15

20

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China’s oil consumption to GDP ratio is high

Oil Consumption to GDP ratio, 2007

Source: Reuters EcoWin

GBR DEU FRA ITA JPN USA CAN BRA MEX ARG RUS CHN IND

Barr

ells p

er b

illion

$ of

GDP

, 200

7 (m

illion

ths)

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

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The peaceful rise of China

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China’s dispute with Japan

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Disputes in South China Seas with its neighbors

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Border disputes with India

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Cooperation with Russia: Tactical or strategic?

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How to “recover” Taiwan?

China 3.0

Major long term challenges for contemporary China

Governance, regime stability, and human rights. Or how to avoid an “Orange Revolution”!

Industrialization and modernization of the economy Job growth and poverty reduction Inequality and social disparities Human capital development, education and health care Managing the demographic transition Improving the quality of the environment Ensuring energy security and access to resources Regulating of the financial sector, including shadow banking Ensuring the “peaceful rise” of its global power without

incurring the wrath of the Western countries!

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Conclusions

China’s challenges are still formidable but the country has made impressive gains, particularly in real per capita income growth, in recent decades. Russell realized the vital importance of industrialization for China’s development and modernization, but also the role of governance, regime stability, and human capital development and scientific and technological capability.

There are similarities between the problems that Russell identified years ago and contemporary China’s challenges, as well as differences and, of course, new problems.

Russell hoped that China, unlike Western nations, could and would develop without resorting to ultra nationalism, militarism, and crass materialism. He was optimistic that China would be a progressive force in the community of nations.