Naïve extrapolation—predicting the continuation of a trend—is a human instinct, probably because the future does usually repeat the present (the sun rises every day, the weather tomorrow is likely to be similar to today’s weather, and so on), so it was a valuable instinct to have under the conditions in which people lived thousands of years ago. The instinct remains a deeply rooted part of human psychology: if a country’s GDP has been growing at a rate of say 7 percent a year for some years, the assumption is that it will continue growing at that rate, at least until some benchmark is reached, such as achieving a GDP per capita that is higher than that of the U.S. And that is the general attitude toward China; it will overtake us, first in aggregate GDP and then in per capita GDP; it will be the new America.
But naïve extrapolation with respect to national economies is treacherous, as Becker points out with the examples of Japan and the Soviet Union, though the examples are slightly different: Japan was growing rapidly, and then stopped; the Soviet Union had stopped growing rapidly when (in our 1960 presidential election, for example) we began fearing that it was growing more rapidly than the U.S. The Soviet Union was about to enter the era of stagnation associated with the Brezhnev years.
China may be an intermediate example. I do not trust Chinese economic statistics, so I don’t know whether its growth is as rapid as we think; but clearly it has grown rapidly in recent years. Becker points out to major obstacles to continued rapid growth: its inefficient public manufacturing sector; and its historic instability.
The obstacle I would be inclined to emphasize is China’s mercantilist economic culture. Mercantilism is the national policy of maintaining a persistently very large positive trade balance in order to maximize employment and accumulate financial resources. When exports equal imports, a nation has essentially a barter system; it derives no net profit from foreign trade. When exports greatly exceed imports, resulting in a heavily positive trade balance, the exporting nation receives imports plus money rather than just imports in exchange for its exports. China, Germany, and Japan—but above all China—are mercantilist nations, which have accumulated huge balances of foreign currencies, particular U.S. dollars, by exporting to the United States much more than they import from us.
A characteristics of mercantilist countries, including the three I’ve named, is that they have weak retail sectors. In the case of Germany and Japan, this is due primarily to restrictions on competition among retailers. In the case of China it is due to a scarcity of retail outlets, a weak system of consumer credit, deficient regulations protecting consumers, sheer inexperience in retailing, rampant corruption at all levels (weakening not only regulation but also control of managers and other employees by the owners of retail businesses), barriers to foreign retail competitors (imagine what a difference Walmart would make in China), and poor wholesale distribution (owing in part to transportation problems). It is far easier to create well functioning export markets that export mass-produced goods, as pretty much all that’s involved is building factories, preferably adjacent to ports to minimize transportation costs and delays, and importing raw materials. So the Chinese focus on exports is understandable. Becker notes that consumption contributes only about half the percentage of GDP in China as it does in the United States.
But without an efficient retail sector, it is difficult to motivate workers in the long run; they may be paid well but be unable to use their money to buy the consumer goods and services that they want. This was a huge problem in the Soviet Union; it is a factor in the very high savings rates in Japan and Germany.
China can more or less at will reduce the ratio of exports to imports, just by appreciating its currency, which would make its exports more costly and imports cheaper. But the immediate effect would be to cause unemployment in the huge export sector, and it would take, in all likelihood, many years for the unemployed factory workers to be re-employed in a gradually expanding service sector.
To some extent this adjustment will take place independently of Chinese monetary policy. As wages of Chinese workers in the export sector rise, exports by other nations become more competitive, reducing Chinese exports, beginning a painful transition to a consumer society.
I conclude that the prospects for a continued high rate of Chinese economic growth are uncertain.