More on levels vs. growth rates
By Scott Sumner
I seem to be one of the few people that are neither a China bull nor a China bear. On one side I’m constantly annoyed by China boosters who claim their rapid growth rate is proof of the superiority of the Chinese model. They often go on to claim that other developing countries should reject the “Washington consensus” and adopt a state-led economic model. And yet the facts show the exact opposite. China is far, far poorer than other ethnic Chinese economies, such as Taiwan, Hong Kong, and Singapore. And those three are all more market-oriented.
At the opposite extreme is people who point out how bad things are in China, without any perspective on the trajectory of change. Some of these people don’t seem to know much Chinese history, and think problems like air and water pollution somehow call into question the incredible gains in living standards since the 1970s, when conditions were appallingly bad. If the people in the Congo or Afghanistan suddenly had Chinese GDP/person, do you think they’d be whining about air pollution?
Of course there’s a grain of truth in both claims, China really is relatively poor and very polluted, and it really has been growing very fast. But I think both views miss the bigger picture:
Think of Mao’s economic policies as a regime capable of producing real GDP per capita equal to 1/20th the global economic frontier (which might have been the US or Switzerland.) Then Deng starts opening up China’s economy, and (combined with later reforms) this moves China to their current policy regime, which might be capable of producing a real GDP/person at 50% of the frontier.
There will be a multi-decade transition period where China sees a 10-fold increase in living standards, plus whatever increase occurred during that period in the leading economies. That will be a period of rapid catch-up growth. It does not mean that China has a good economic model in an absolute sense, it obviously does not. But merely by being less bad you’ll have a lot of catch-up growth.
Over the next 30 years I expect China to do more economic reforms, and eventually reach a model roughly as efficient as Japan, France, Britain etc., that is, a model capable of delivering about 70% of the US RGDP/person. Obviously that’s a guess, and I have no proof, it just seems like the mostly likely outcome, all things considered. But it’s also possible they stay at 50%, or go to 100%.
BTW, China is not currently at 50% of US income per person, far from it. My claim is that they’d eventually get there with their current regime, assuming no more reforms.
Many people also seemed confused by my claim that bad economic policies don’t affect long term economic growth relative to other countries, except during a transition period. I think most people did understand my claim that if France’s welfare state reduced hours worked by 30%, their GDP/person would fall that far, and then growth would resume from that point forward. Rather the concern was that some policies reduce innovation, and hence long term growth.
Let’s say African countries had a bad education system, and that reduced innovation. Would that reduce long term steady state growth in Africa? I doubt it. Africa did poorly for a few decades after the end of colonialism, as governance declined in quality. But since that one-time adjustment, Africa has been growing as fast or faster than the US. Even if Africa doesn’t produce technological innovations, that doesn’t stop 100s of millions of African peasants from getting cell phones. It simply means the level of African income might be only a fraction of the US. But when that level is reached, growth going forward over the millennia should be about the same in both places. A few centuries from now Africa may still have only 5% or 10% of US real income/person, but it might well be richer in absolute terms than the US is today.
There are many developing countries now considered “poor” that are actually richer than Britain in 1890, even though Britain was then one of the richest countries in the world. A developing country like Malaysia is several times richer than Britain was back then, and even Thailand is probably richer.
Levels and growth rates. The key to seeing the big picture is keeping both concepts in mind, and understanding which concept best applies to the specific situation being examined. Different policy regimes produce different long run steady state incomes, as a fraction of the top country. Then when policies change there is a transition period of faster or slower than global growth, as the country adjusts to its new level.
PS. Alex Tabarrok recently linked to an article questioning the accuracy of China’s unemployment data:
So how high is Chinese unemployment today? No one knows but it could well be closer to 10% than to 4.1%.
The data doesn’t show much variation, which is hard to reconcile with the large variation in real GDP growth. On the other hand I do think the reported rate (4.1%) is reasonable. On my last trip to China (in 2012) I noticed help wanted ads all over the place, in the windows of small businesses. Wages have been rising very rapidly, and factories report difficulty in finding enough workers. The recent slowdown in China may have changed that picture–if so it should show up in the wage data. I’d guess that unemployment is now trending upward.