How long can the China boom continue?
By Scott Sumner
[I wrote this post 10 days ago. Tyler Cowen blogged on the same subject today, so I figure I better post it before it becomes old news.]
China’s been booming since it started moving away from communism in the late 1970s. In recent years the growth rate has slowed, from double digits to about 6.5%. Some people expect it to slow much further in the near future.
The Financial Times has an interesting graph (which they got from a management company), showing growth rates as a function of income per capita, relative to the US. The graph includes China and 4 other Asian economies that had long periods of rapid growth:
\The darker red dots show China, which has advanced from extreme poverty to a level about 21% of US incomes (this is in 2014, it’s a bit higher now.) The article is relatively optimistic about China’s growth prospects, pointing to the fact that other East Asian countries maintained growth rates of 6% to 8% until they reached about 40% of US levels, after which growth slowed gradually. (Japan actually started going into reverse in the 1990s, losing ground relative to the US.)
It seems to me that this will be an interesting test of the “institutions vs. culture” debate. Some people have noted that much of the developing world seems to get stuck in a sort of “middle-income trap” where they stop catching up to advanced countries once they reach the level of Brazil or Turkey or Thailand. The exceptions seem concentrated in East Asia, especially places with Chinese, Japanese or Korean cultures. (Vietnam is occasionally included in this group.)
Others suggest that good institutions are the key to growth, and the huge divergence between North and South Korea is cited as a powerful example. Although China has done a lot of market reforms, it remains considerably more statist than the rest of East Asia.
So the “cultural” theory of development suggests that China will continue growing at a fairly rapid pace. The institutional theory suggests that China might get stuck in a middle income trap. Personally, I’m less optimistic about China than one might expect from the FT graph, because I think good institutions are pretty important. However, I’m not quite as pessimistic as many other observers, as I believe China is likely to continue reforming their economy. China seems more committed to eventually becoming a rich country than is the case for places like Brazil, Turkey and Thailand. Thus, for example, China spends far more on infrastructure than Brazil, and far less on transfer payments.
Because of all these factors, I expect Chinese growth to slow somewhat over the next decade, but also to maintain a pace well above most other middle-income countries. It is still on course to become fully developed country, albeit it will take China a bit longer than more free market places like Singapore, Hong Kong and Taiwan.
PS. One way to understand China is to read this story about some determined Chinese peasants who built a 6-mile irrigation canal through three mountains, and then watch this amusing one-minute youtube video.
It’s all the same country.