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Why the Days of Superfast Chinese Economic Growth May Be Over
Back in 2010, there was an issue ad showing a “Chinese professor” in the year 2030 lecturing his students about America’s collapse. “Why do great nations fail?” he asked. “The ancient Greeks, the Roman Empire, the British Empire, the United States of America — they all make the same mistakes, turning their back on the principles that made them great.”
Sure, America faces some big economic challenges. But what about the other side of that equation? Does China have the right principles and institutions to dominate the 21st century?
Consider: China currently has a $9 trillion economy vs. $17 trillion for America. It makes a great deal of difference how fast China grows in the future. For instance: If China were to grow as fast the next two decades as it did 2000-2010, about 9.7% a year, its GDP would grow to $60 trillion by 2033. Such an increase, Lant Pritchett and Larry Summers write in their new paper “Asiaphoria Meets Regression to the Mean,” would mean a gain in GDP “more than three times as large as the current U.S. economy. The continuation of current growth rates would make China far and away the world’s dominant economy.” This is the future depicted in the Chinese professor ad.
But most economists don’t think that scenario as likely as a slowdown. So let’s knock off a couple, three percentage points and figure 7% growth. If that were to happen, China’s GDP would grow to $36 trillion by 2033.
But Pritchett and Summers are even more pessimistic. As they calculate, historical trends suggests Chinese growth of just 3.9%, meaning a 2033 China GDP of $21 trillion, not $60 trillion. By contrast, US GDP — modestly assuming 2% real growth and 2% inflation — would be $36 trillion. America would remain the world’s dominant economy.
Here is why Pritchett and Summers are gloomy about China (and India for that matter):
Consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated.
Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap.
Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates. We suggest that salient characteristics of China—high levels of state control and corruption along with high measures of authoritarian rule—make a discontinuous decline in growth even more likely than general experience would suggest.
In other words, not only does history suggest superfast growth is tough to maintain, but that finding may especially be true of nations with awful institutions. Authoritarian states or those with statist macroeconomic policies rife with crony capitalism are typically not the sort able to generate dynamic growth over the long term. (You need to think about this, too, Washington.)
This is hardly good news, though. The faster China and India grow, the faster the global economy grows and the faster millions of people move out of poverty. What’s more, slower growth might affect the stability of the Chinese regime with unpredictable consequences:
… much geopolitical analysis has focused on the implications of a rising China, and certainly Chinese international relations theorists have extensively studied past rising powers. Contingency planning should also embrace scenarios in which Chinese growth slows dramatically, presumably bringing with it a range of domestic and international political implications.
Then again, without regime change China may be unable to transition to a more organic, free enterprise-driven economy capable of better generating and using innovation. I think I have a few questions for that Chinese professor.
Published in General
GDP is not the greatest yardstick. It measures activity instead of return. Anyone can engage in make-work. On the return on capital and return on labor measures, America dominates by an enormous margin.
To illustrate, the Taiwanese company Foxconn employs hundreds of thousands of people and has $130 billion in revenues. Lots of activity at Foxconn which is valued at $48 billion.
By comparison, Apple employs 50,000 and has $180 billion in revenues (so 38% more than Foxconn). But Apple is much more profitable and is valued at $580 billion, 12 times the value of Foxconn.
Foxconn engages in a low return activity, Apple in a high return one. The Chinese professor needs to go back to school.
< devil’s advocate mode = on >
Predictions about the imminent bursting of the “Chinese Bubble” aren’t new. Here’s the Google NGRAM chart for the phrase “chinese bubble” from 1980 to now.
I’m just sayin’…
< devil’s advocate mode = off >
Neither were the predictions of Japan overtaking the US throughout the 1980s ;)
Economic growth rates are like efficiency curves: you move really fast when you’re staring off from the bottom, and then it becomes increasingly more difficult to grow the further up you move.
Hence it’s an almost certainty that China’s growth rate will slow down, as they become richer and more developed.
Also keep in mind that the vast majority of Chinese economic growth is export oriented: i.e. much of it is owned by foreigners, carried out by foreign firms, and directed at foreign markets. Primarily owned by Taiwanese, Korean and Japanese firms (and usually run by ex-pats from those countries).
But I don’t think this will translate to any political problems in China. Slower growth rates come about as the country becomes richer.
The real problems in China might come about from the existence of the state-owned companies, most of which are noncompetitive, and the effects of the 1-child policy.
PS: Just as regression to the mean is a feature of economic growth, so is institutional convergence. I.e., over time, I would expect China to become closer to the West in institutional types. I’m sure 90% of the Chinese that matter, think the same way. Which is why they are so eager to post their companies on the Hong Kong or US stock exchanges. They know the institutional weaknesses of China. But that also means, those will be changing too.
Both India and China are still third-world countries, with a thin veneer of civilization. Scratch that veneer, or venture not very far out into the countryside of either country, and you find hardscrabble farming villages, where people earn very little on their tiny plots, and they lack basic services like sanitation (Indian villagers defecating outdoors in fields) and 24-hour electricity. In India, many cities are over-crowded slums, with the majority of people not working full-time, and supporting large families, living in shanty-towns and stealing power from the nearest pole. Not good conditions for sustained growth.
@AIG- RE comment 3.
I hope you’re right, but I suspect that given a major recession or depression, China’s leaders would be sorely tempted to distract the populace by stirring up hostility, say towards Japan or China. And given Obama’s plans to reduce our military to its pre- WWII size, combined with our unfunded liabilities, a weaker America might tempt them to become increasingly aggressive, following Putin’s example. I meant to say towards Japan or Vietnam; I can’t edit on my phone.
I expect China to become an economically and politically more important nation. However the current Chinese system is an impediment to that.
If the Chinese reform politically and economically there’s no reason China couldn’t surpass the US. However then China wouldn’t be a threat to us but an open and free society that shoulder the burden to maintain world order. If China fails at reform there’s no guarantee it won’t end up worse off than it is now politically and economically.
One limiting factor for China is demographic. China’s labor force is set to shrink long before America’s labor force stops growing. China is relatively resource poor compared to America. China is staggeringly corrupt. China is re-balancing growth and investment away from small firms and towards subsidized corrupt behemoths and real estate speculation.
While I have no certainty in America’s economy over the next 15 years, I share the same and worse doubts about China.
As Mark Steyn likes to say, “China will grow old before it grows rich.”
The former Soviet Union had an enormous growth rate in the 1930’s, too – but that did not end very well for the bulk of participants in that economy.
China’s not killing millions anymore, but to assume that the accelerated growth rates would continue indefinitely ignores both historical trends and pure economic reality. When you’re starting from zero, your growth rate will skyrocket, but sooner or later that rate of acceleration is going to slow down, no matter what you do. That’s why GDP growth rates of 3%-5% in developed countries is more the norm, and that’s where China will eventually find itself.
Also, we don’t have 30 million people living in caves. So there’s that.