Why China Will Never Be as Wealthy as America

 

Hong KongAs a candidate, Donald Trump expressed envy for the brilliance of China’s leaders and the fast pace of China’s economic growth. But the reality of China today doesn’t merit envy from an American president. As my AEI colleague Derek Scissors recently noted, some data suggest China’s economic importance to be falling — certainly relative to that of the United States.

For example: There is a massive gap between American and Chinese private wealth, according to Credit Suisse estimates, of more than $60 trillion and growing. Scissors: “The once-fashionable question of when China will pass the United States in economic size has given way to wondering if it will ever happen. The answer is, not for decades and probably never.”

But the wealth gap alone doesn’t explain being pessimistic about China. To complete the analysis, one needs to mention how China has stopped moving toward a more market-driven economy. Call it crony capitalism, corrupt capitalism, or state capitalism — it’s not competitive-entrepreneurial-innovative capitalism. As Scissors recently said in the South China Morning Post, “This government talks of reform, but protects poorly operated state-owned enterprises and remains hostile to market-based competition.”

More on this from Martin Wolf in the Financial Times today:

Corruption is the progeny of the marriage between the party-state and the market. It spreads by enticement, coercion and imitation. Once corruption becomes normal, the system risks reaching a tipping point. That is just what Mr Xi fears. The special characteristic of Chinese corruption is that it has coincided with a huge increase in wealth. The corruption has not prevented this. Instead, growth and corruption have gone together. They may well, for a while, have even been mutually supportive: corruption oiled growth, which funded corruption.

The main characteristics of Chinese policy over this period have been threefold: liberalisation of markets; devolution of power, and contested and insecure property rights. Control of property was decentralised but did not carry secure ownership with it. When control over property is a privilege, not a right, as in China, those with the political power have the ability to make themselves (and those they favour) vastly rich. That is just what they have done. Party servants have expropriated their own state of valuable assets, including land and minerals.

The need for collusion in so doing came from the fact that no single person controlled the means — property and permissions — needed for economic activity. Collusive rings duly emerged. Some were managed by senior officials (yibashou) — often party secretaries — in “vertical collusion”. Some were managed by officials of similar rank, in “horizontal collusion”. Some were managed by private entrepreneurs or even gangsters. In some localities, the outcome has been a form of “mafia state”. Corruption has even been found in the Communist party’s disciplinary mechanisms, the security services and the People’s Liberation Army. These are all core institutions of the party-state itself.

The question, however, is whether much can be done beyond putting a vast number of people in prison. Mr Xi’s answers seem to be more Leninism and more markets. Yet this is a highly problematic combination. The reason Deng Xiaoping promoted devolution of decision-making is that China is too vast for anything else. Today, the complexity of the economy makes centralised political control even more unworkable. It is, in practice, impossible for the centre to control the activities of all its agents. Yet it cannot make them accountable to the people either, since that would destroy the party’s monopoly of power. … If a market economy is to be combined with reasonably non-corrupt government, economic agents need legal rights protected by independent courts. But that is precisely what a Leninist party-state cannot provide, since it is, by definition, above the law.

Quite the conundrum.

Members have made 13 comments.

  1. Profile photo of DocJay Member

    So if he puts up a Mao Christmas ornament in the white house that’s probably a sign of something, right? Wait, he’ll have a drag queen one too to even it out.

    • #1
    • December 13, 2016 at 4:22 pm
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  2. Profile photo of I Walton Member

    The case is convincing. Corruption, trade in influence, cliques, gangs, syndicates,guilds, flower then harden, but it took centuries, now at least many decades to fossilize and harden into an old stagnant culture. The materialism and entrepreneurialism that drives their economy is part of the same dynamic that with so much centralized power, leads to fossilization. (See Mancur Olsen, The Rise and Decline of Nations) We’ll have to deal with a rising China for many decades so it would be wise for us to scrape off our own cliques, gangs and syndicates. If Hillary had won it would have been almost impossible because we are so far gone, now it’s possible but it requires dedication to recreating a truly open market economy. I hope President elect Trump learns how to balance the demands he won with which he must address, and the economic political and cultural reality essential to long term prosperity and the flourishing we used to count on.

    • #2
    • December 13, 2016 at 6:12 pm
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  3. Profile photo of RushBabe49 Thatcher

    China is a Communist Country. Don’t ever forget that. When thinking about any aspect of Communist China’s economy or culture, all you ever have to remember is China is a Communist Country. Communists control every aspect of their peoples’ lives, from birth to death. No “free” market will ever arise out of a Communist country. The Communist rulers of China may let out a bit of rope here or there, but it will be quickly withdrawn if the people look like they might be getting wealthy or educated enough to resent the ropes that bind them in the end.

    • #3
    • December 13, 2016 at 7:14 pm
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  4. Profile photo of AnonyMouse Thatcher

    Comparing the “wealth” of two countries like China and the USA is not apples to apples. I know people do it all the time, but it’s not a fair comparison. We could compare industrial output, consumer buying power of a similar basket of goods, government spending, even GDP. But where would people rather live? Would you rather be driving a Mercedes in China, or a bicycle in California? Wealth in China needs to be heavily discounted, e.g. based on a survey of how much the average citizen of the USA would need to be paid to defect to China versus how much the average Chinese person would pay for US citizenship if they could afford it.

    • #4
    • December 13, 2016 at 10:58 pm
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  5. Profile photo of Marion Evans Inactive

    AnonyMouse:Comparing the “wealth” of two countries like China and the USA is not apples to apples. I know people do it all the time, but it’s not a fair comparison. We could compare industrial output, consumer buying power of a similar basket of goods, government spending, even GDP. But where would people rather live? Would you rather be driving a Mercedes in China, or a bicycle in California? Wealth in China needs to be heavily discounted, e.g. based on a survey of how much the average citizen of the USA would need to be paid to defect to China versus how much the average Chinese person would pay for US citizenship if they could afford it.

    Aah… to ride a bicycle in California…

    • #5
    • December 14, 2016 at 4:17 am
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  6. Profile photo of Russ Schnitzer Member

    James, let me remind you “never” is a very, very long time. In only my lifetime I have seen astounding economic changes happen in many countries. Hong Kong and Singapore immediately come to mind regarding changes of economic wealth. China and India have only fairly recently adopted increased aspects of Capitalism and this change has brought hundreds of millions of their populations out of abject poverty. On the other hand, the USA has been moving toward more Socialism and now 2% economic growth is considered by many to be the best we can do. I would remind you, and readers, that even slow 2% growth in the USA is not a guaranteed minimum growth rate. I have read that Venezuela used to have a high standard of living and Chile a low standard of living in South America. These countries have reversed positions.

    Should China continue to adopt more Capitalism (free markets) and the USA continue moving away from Capitalism, it is not that difficult to imagine China surpassing the USA in wealth at some point in the future.

    The future arrives much sooner than most imagine.

    • #6
    • December 14, 2016 at 9:17 am
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  7. Profile photo of Phil Turmel Thatcher

    Russ Schnitzer: Should China continue to adopt more Capitalism (free markets) and the USA continue moving away from Capitalism, it is not that difficult to imagine China surpassing the USA in wealth at some point in the future.

    Concur. And in particular because of the reliance on measures of private wealth. Much of that private wealth is valued base on the economy it operates in. If the economy stays stuck on neutral or negative, that private wealth will shrink in value.

    • #7
    • December 14, 2016 at 9:24 am
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  8. Profile photo of Jamie Lockett Reagan

    The only people that fear China overtaking the US as an economic power have never actually been to China.

    • #8
    • December 14, 2016 at 9:37 am
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  9. Profile photo of Could Be Anyone Member

    Marion Evans:

    AnonyMouse:Comparing the “wealth” of two countries like China and the USA is not apples to apples. I know people do it all the time, but it’s not a fair comparison. We could compare industrial output, consumer buying power of a similar basket of goods, government spending, even GDP. But where would people rather live? Would you rather be driving a Mercedes in China, or a bicycle in California? Wealth in China needs to be heavily discounted, e.g. based on a survey of how much the average citizen of the USA would need to be paid to defect to China versus how much the average Chinese person would pay for US citizenship if they could afford it.

    Aah… to ride a bicycle in California…

    • #9
    • December 14, 2016 at 10:29 am
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  10. Profile photo of Z in MT Member

    Russ Schnitzer:James, let me remind you “never” is a very, very long time. In only my lifetime I have seen astounding economic changes happen in many countries. Hong Kong and Singapore immediately come to mind regarding changes of economic wealth. China and India have only fairly recently adopted increased aspects of Capitalism and this change has brought hundreds of millions of their populations out of abject poverty. On the other hand, the USA has been moving toward more Socialism and now 2% economic growth is considered by many to be the best we can do. I would remind you, and readers, that even slow 2% growth in the USA is not a guaranteed minimum growth rate. I have read that Venezuela used to have a high standard of living and Chile a low standard of living in South America. These countries have reversed positions.

    Should China continue to adopt more Capitalism (free markets) and the USA continue moving away from Capitalism, it is not that difficult to imagine China surpassing the USA in wealth at some point in the future.

    The future arrives much sooner than most imagine.

    2.5% growth is about the best we in America ever really did. The rest of the long term USA growth rate of 3-4% was due to population growth. The population is no longer growing, so 2-3% is the best we can hope for. All the politicians that promise 4% long term growth are making false promises.

    • #10
    • December 14, 2016 at 1:34 pm
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  11. Profile photo of Mike-K Coolidge

    AnonyMouse: how much the average Chinese person would pay for US citizenship if they could afford it.

    I see Chinese citizens joining the US Army every day so they can get citizenship and become Americans. I suspect they plan to being their parents over as one of my medical students explained a few years ago. She was a graduated of Beijing U and her mother was a professor but she did not trust China to care for her parents.

    • #11
    • December 15, 2016 at 5:37 pm
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  12. Profile photo of Mike-K Coolidge

    Z in MT: The population is no longer growing, so 2-3% is the best we can hope for.

    Trump just might confound many expectations.

    • #12
    • December 15, 2016 at 5:39 pm
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  13. Profile photo of TeamAmerica Member

    Mike-K:

    Z in MT: The population is no longer growing, so 2-3% is the best we can hope for.

    Trump just might confound many expectations.

    Yes. In a recent post Scott Adams pointed out that over the past 5 weeks Trump has created billions (perhaps trillions) in wealth out of thin air. This was done by increasing confidence and optimism across the board, from beleaguered blue collar workers to middle and upper class investors. I expect good times are ‘acoming.

    • #13
    • December 17, 2016 at 12:13 am
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