Former United and England midfielder Scholes is worried that home-grown youngsters are not getting opportunities because clubs can shop cheaper abroad, and feels the national team will continue to struggle unless there is a limit on the number of foreigners allowed in each Premier League squad.
Football Association chairman Greg Dyke has proposed that a new League Three be launched by 2016, which would be made up of 10 teams from the current Conference and 10 'B' teams from Premier League clubs, but Scholes is not convinced England will flourish in the next few years.
Scholes wrote in his blog for Paddy Power: "Greg Dyke, the chairman of the Football Association, believes that proposed changes to the league system could help England win the World Cup in 2022.
"From what I've seen at this World Cup, we'll be lucky to qualify. I fear England are going the way of the Republic of Ireland, Wales and Scotland.
"England can take some positives. Raheem Sterling, Daniel Sturridge and Ross Barkley, even though he didn't start the first two games, are a sign of the future - fast, intelligent footballers. But otherwise I'm struggling."
Dyke's B-league plan is aimed at increasing the number of English players starting for Premier League sides, with only 32 per cent of starters in the 2012-13 Premier League season qualified to play for England according to the commission's report.
Scholes acknowledges that is a major issue to be addressed and feels the inflated prices paid for English players - citing his former club's reported £34million move for Southampton full-back Shaw - have led to a glut of mediocre imports.
“Compared to La Liga and the Bundesliga, English players are not getting enough first-team time in the Premier League," said Scholes.
"We're going backwards from 1990 and the era of Paul Gascoigne and that conveyor belt of talent. Simply, the Premier League is riddled with average foreign players. This is having a detrimental effect on the opportunities for young English talent and our international results.
"Players as talented as David Silva, Robin van Persie, Sergio Aguero and Eden Hazard only make the Premier League stronger. But it seems the Premier League is known as a market for average players (or their agents) to say: 'I'll go to England and they'll pay me stupid money to play'.
“The Premier League is a cash cow and it’s hurting our national game.
“Yes, we should limit the amount of foreign players allowed in each Premier League squad. Clubs will then only sign the best, and English talent gets priority for development.
“Lower teams might be annoyed – but the best players are only going to go to the top teams anyway.
“The proposed £34m transfer for Luke Shaw to United is another example of something which has a bad long-term impact. Clubs are priced out of this market which is why they go abroad for cheap options. For a left-back to be worth £34m shows how silly the game has gone."