Is China’s Economic Future a Rosy One? Becker

Starting with the opening of agriculture to private incentives in the late 1970s, China has experienced faster and more prolonged economic growth than any other country. In a mere three decades China has moved from a very poor nation to a middle-income level country, a development that pulled hundreds of millions of Chinese out of poverty. China’s aggregate GDP is now second in the world only to that of the US. While its per capita income is still much smaller than that of America’s, many are predicting that even China’s per capita GDP will surpass that of the US in a few decades.

Perhaps, but let us not yet get carried away too quickly. Two other predictions in recent decades of countries beating the US are a reminder that projections of continued trends in income growth can be way off the mark. In 1956, Khrushchev proclaimed that the Soviet Union would bury the US, not militarily but economically. One might at the time have dismissed this as the exaggerations of a loud and belligerent leader, but similar predictions were common among mainstream economists. Various editions of Paul Samuelson’s best selling textbook Economics: An Introductory Analysis predicted that by a certain date the Soviet Union’s GDP would exceed that of the US, but each later addition delayed the date of overtaking. In the latest additions, that prediction was dropped from the book since by then it appeared ludicrous. As everyone knows, the Soviet’s centrally planned economy collapsed by the end of the 1980s, and Russian per capita and aggregate income remain far below America’s.

Japan’s economic growth was far more impressive than that of the Soviet Union since it continued at a rapid pace throughout most of the period from the 1950s to the end of the 1980s. In the 1980s, stocks on the Nikkei and housing prices in Japan reached enormous levels. Japan was substituted for Russia as the country that would before long overtake the US, and become the leading economic power (see, for example, Herman Kahn, “The Emerging Japanese Superstate: Challenge and Response). Yet Japan’s rapid growth stopped abruptly during the early 1990s, and that country Japan has largely stagnated economically for the past two decades.

These two examples do not prove that forecasts about China’s future growth will also prove to be much too optimistic, and that China’s growth rate will slow dramatically in the near term future. China’s continuing rapid growth over each of the past three decades despite many obstacles has contradicted the many naysayers during these decades. The energy of Chinese businessmen and workers has been refreshed after China’s long slumber as an economic power, and they are eager to try to recapture China’s past economic glory.

Still, I believe that China’s continued rapid growth is not assured, and that it must overcome several serious remaining obstacles if it is to join the club of rich nations. Tomorrow, the World Bank and the Development Research Center of China are issuing a joint report called “China 2030” that discusses major impediments to continued rapid growth. From media discussions of this report, I gather that the report and I are in general agreement on the importance of the impediments and the difficulty of overcoming them.

Perhaps the most important problem, one not easily corrected because of strong political opposition, is that close to one half of manufacturing output is produced by state owned enterprises (SOEs). These enterprises are less efficient on the whole than private companies, they often have monopolies in their sectors, they are not important innovators, and they get privileged access to capital from state-owned banks.

The China 2030 report argues that the SOEs must operate more like commercial companies, but that is not easy since officials from the Communist Party usually have high positions in these enterprises, and many of the larger SOEs are closely related to the Communist Party and the military. The ideal solution would be to privatize most SOEs, but that does not seem likely in the near future. This is partly because government officials would lose power if SOEs were privatized, and partly because the government fears that privatized companies would greatly cut employment and increase social unrest.Unfortunately for China, it would not be possible to close rapidly the per capita income gap with rich countries as long as a large fraction of manufacturing output in China is produced in over-manned and inefficient state enterprises.

Private companies in China have great difficulty borrowing from state banks since most of their lending goes on favorable terms to the SOEs. The financial crisis in the West has increased the reluctance of Chinese leaders to open their capital markets to competition from foreign banks and funds. Yet greater private banking access to Chinese companies and households seems essential for China’s continued rapid growth.

China is very worried about social unrest, as it observes the Arab Spring and other unrest toppling governments. Many protests in China originate in rural areas where farmers complain about their inability to sell the land they farm, and about local governments that arbitrarily take their land to build factories or infrastructure. The Chinese government also fears the 150 million migrant workers who complain about their low wages, and about the discrimination against them in gaining access to housing, schools for their children, and health services. Unrest also arises from non-migrant factory workers who complain about working conditions, and arbitrary differences in wages between workers with similar productivities. Basically, most of the unrest in China is due to the fact that much of the increase in inequality is not grounded in productivity differences, but rather in discriminatory government rules and behavior.

As China continues to grow, households will demand that a larger fraction of national income goes into consumer goods and services at the expense of investments and the accumulation of foreign reserves. Spending on consumer goods accounts for only 35% of China’s GDP compared to over 70% in the US. Chinese enterprises would be induced to look more to its domestic market if the Renminbi was allowed to float and appreciated a lot relative to the dollar and other currencies. For then Chinese companies would have more trouble exporting their outputs to other countries.

Ultimately, the challenge for China is to move more toward a private enterprise economy with flexible and competitive labor and capital markets, where assets like land can be bought and sold rather freely, and where workers are free to move around the country without discrimination, and to take whatever jobs they want. I confess I do not know if China will make these reforms quickly enough to prevent a sizable slowdown in their drive to becoming a rich country. The experiences of both the Soviet Union and Japan shows both that it is very hard for countries to change their ways when they have had considerable economic success, and that the slowdown in growth rates is abrupt once it happens. Still, I would not bet against the ability of Chinese leaders to radically change their economic ways once again if that becomes necessary to continue to grow rapidly.

 

 

 

 

Comments

[David]

Hi

Actually i want placement of 2 logo links for 3 months site wide at http://www.becker-posner-blog.com

example is shown on www.radut.net. Links are of www.dinodirect.com

Kindly send me you price.

Remember its not our final deal, we'll deal in future too. Most probably these links be renewed after 3 months.

Looking forward for your kind reply.

Regards

[Jack]

Geez! nearly complete agreement with Prof Becker this week! I'd only add the looming problem of China's population rapidly aging due to their low birthrate.

We in the US also have a low birthrate but our population grows due to immigration that will help to provide SS and H/C for our older folk.

Lastly, there seems some, sports minded? fascination? paranoia about the day when China's GDP surpasses that of the US. I suppose this is driven by our fear that they'll (foolishly) spend the percentage of GDP as does the US or did the USSR during the "cold war".

They'd then build their "blue water Navy" and soon show up off San Diego to invade us or demand better or more authentic food from the thousands of nearby Chinese take-out cafes.

In short isn't this GDP issue silly? If you draw a line around enough poor people you can match the GDP of the US or that of the EU, but that still leaves their population with a per capita income one quarter that of the US. Kinda like our neighboring Mexico.

[Curt Doolittle]

Professor:

I agree. But the question is the time frame.

American prosperity is dependent as much upon its military capacity and currency as it is upon its advantages in formal institutions, puritanical culture and cheap land. Americans have made money for two centuries by selling off those institutions, puritanical culture, and cheap land to immigrants. Had the North Americans had a French totalitarian government instead of an English republican one, the country could have expanded and become a world power just as easily if not more so by selling off that land and new English industrial technology to immigrants. So how long can the Chinese import western technology and sell it to their own people as they migrate from rural to urban locations and life styles?

It only has to be long enough that they can disempower US military capacity, disempower US currency, disrupt US trade patterns, import a 'tipping point' amount of western technology, and alter the world trade and geopolitical power structure. Wouldn't that very likely nearly halve American standards of living?

It can take three or four generations for china to feel middle class economic pressures can't it? And a country that willing to oppress its people will generally externalize its internal failures -- like Iran profits from sabre rattling.

So, I tend to believe the time frame is longer and the impact greater than the Japanese example, and at least as long and as influential as the Russian episode has been -- if not longer.

And in the meantime -- although Americans never new, or have forgotten -- the Russian generals just wouldn't pull the trigger even if they were ordered to, for moral reasons. The question would be whether the Chinese have the same moral constraints. And a lot of us might argue 'no'. Their entire cultural framework is built on avoidance and deception in order to buy time to make conflict unnecessary. Our entire culture is built on the quick resolution of differences and transparency. Their world view is endemic. Look at our depiction of man in art. Look at theirs. They have a nihilistic view of human nature that a rise in the middle class must eventually defeat as you suggest. But that could take just long enough that a lot of damage is caused in the meantime.

I'm not sure China isn't a sixty to one-hundred year problem for us and perhaps the world.

[CoonAndFriends]

I quite agree with professor Becker's remarks, and if I were American I would not be afraid of Chinese expansion. I don't understand what the Chinese government's plan is for the elderly given their low birthrate - whatever it is, it will be very very expensive; and social unrest will likely continue to be a problem, which is good news for both the US and the Chinese people.

[TANSTAAFL]

The World Bank's "China 2030" report is a whitewash. It omits any candid discussion of political repression in China, the tottering foundations of the Chinese banking system, and the PRC's failure to honor international law.

[dailylinkbuilding]

information is just amazing i like ur post and book marked ur site

[topratedcoffeemakers]

Its amazing information for my research.thanks

[Southern JD]

The shallowness of this essay is very telling. All that we can say for sure about Becker is that he is a Bourbon who never learns and never forgets.

Let's start with the never forgets part. We are given examples of Russia and Japan, without reflection.

As for the never learns part, he does not ask, Why has China been able to grow and adapt to this point. Until one gauges the strength of China, one cannot guess at whether it can overcome its weaknesses.

The real true answer to me is that people matter and we know next to nothing about the people who will matter in the future in China.

If one thinks people don't matter, remember Ronald Reagan. He was wrong on every policy but right on personality, which trumped.

[Scholarship]

Nice post. This is very good. I love reading this story. I will share this to my friends.

[Personalised Hoodies]

Good research and write for people who want to start business in China.

[fag bearing catalog]

Though you may be afraid of Chin's expension, while, as a ordinary chinese people i have to say,we must or have to be more stronger, specially when we learned how the weakers would be in history.

[Jack]

CoonAndFriends -- You do make some worthy points regarding culture amid you generally fearful predictions.

One.... is that of motivation. Having been in Korea at a time when cab drivers drove from 6 am to midnite curfew for about $20/US I can report that they didn't work longer due to the curfew, nor shorter due to the discomfort of going without food or basic necessities.

The Chinese are surely in the same phase of economic necessity.

On comparing Chinese militarism with that of the, former, USSR, I'd point out that in Chinese history they have NEVER been successfully invaded and that their periodic revolutions tended to be a rather business-like throwing out of a Dynasty gone weak and fat by those having hardened themselves as "outs" after a fairly brief demonstration of superior power.

Russia will likely never forget the costs of having been invaded and surely much of their post-WWII expansionism was driven by wanting to buffer themselves from Germany and deprive Germany of potentially additional invasive power.

The US? Like China, except for those days of our infancy, has never been successfully invaded and even today it would seem A. VERY costly to the attacker B. difficult.

Could a re-militarized (if they ever were considered a global military power??) China exert power in Asia and perhaps even in the M/E oil fields? Sure.... and great! let them deal with a few hundred years of attempted peace keeping there as the US has it easily within its grasp to be dependent only only oil/gas that comes from the Americas..... while the other 3/4ths of world demand can be supplied by the M/E, Russia, etc.

As for China being a 60-100 year "problem" for the US I'd remind the overly paranoid of the Chinese/Japanese game of "GO" in which the offense can be quickly turned into a defense and the "inside" quickly become the "outside" in the tussle over territory.

For example their ability to grow rapidly on exports to the US and EU are limited by their current product mix, the mix they might attain, and the fact of our spending FAR more of our income on goods and services that must come from our own locale.

Will they, and a soon to join the world community NK and other Asian nations become richer? Sure. Then they can buy more of our stuff including surplus grains and travel the world as did the Japanese when they became wealthy in large part by selling into our huge consumer market.

Lastly, I question why you and so many ascribe evil intent to the Chinese culture; those people who have long emigrated to N. America and have prospered from strong work ethics and scholarship.

But perhaps you mean a "bad draw" in terms of a non-democratic government. Even so it's likely that the worst of them perform some "risk reward" calculation and come up with the fact of major turf wars having been rendered profitless about the time nuclear destruction was invented.

Sure we've played at "war" since but primarily via the very strong attempting to impose hegemony or perhaps order on the weak and disarmed at great cost and little benefit. Ike, the great general pulled back from Korea (as did Truman in curbing MacArthur) rather than risk a land war with China with USSR backing.

For example being close and antagonistic neighbors could either India or Pakistan benefit by a first strike against the other?

In conclusion, have we gone so far with our overspending and emphasis on military power that we're at risk of seeing the world primarily in militaristic terms?

[Lisawhite]

Pretty insightful post. Never thought that it was this simple after all.Keep it up.

[Pedro Cosme]

The Japanese economy GDP stopped growing because it attained the "technological frontier" (38000USD) in the middle of the 1980s and its active population is decreasing.
Since 1985, its growth rate per person in the 15 to 64 age interval is identical with that of the USA: the Japanese economy grew 1.54%/year (per person in the 15 to 64 age interval) while the USA has growth 1.47%/year.
In the period 2000-2010, the Japanese economy grew 1.31%/year (per person in the 15 to 65 age interval) twice that of the USA (0.58%/year), UK(0.72%/year) and similar to Germany (1.28%/year).
Data from the World Bank.

If China is able to implement a smooth transition to the democracy (that did not occured in the USSR), i predict that china will attain the "technological frontier" somewhere near the year 2050.

See the next post (it needs translation from portuguese language):
http://economicofinanceiro.blogspot.com/2012/02/o-erro-de-ricardo-reis.html

Pedro Cosme Vieira

[Abercrombie]

Thanks for this great post it was very informative and helped me with my own project I am attempting to complete.

[teterrrerrrvbvbvbvb]

Sometime the unexpected things happen in our lives so Pay day loans are quick and very fast way to get your hands on the cash when you need it most. It is a short term solution for our needs and we worry about that where else we have to get it.

Pay day loans have been very easy and fast with us because we are providing you people a great offer to get the quick cash which you have a need for those unexpected expenses which is related to your ordinary life.

We will offer you more opportunities to find your financial solution so don’t worry what’s the matter will be? Just keep in touch with us.

Special thanks

[Kazantip Voyeur]

Hello to all, how is the whole thing, I think every one is getting more
from this site, and your views are nice in favor of new people.

[Aliza Britney]

Hi, You post an important Economic Future servicing article. I also take your service immediately.
Thanks
Aliza Brienty

"Vinnys Towing and Recovery"

[College management Software]

That momentum carried me forward, and without really ever deciding if it was what I wanted, I found myself with four more years of school ahead of me.

[Jordan Retro 12]

높 은 여성 부츠 Ugg 부츠 여인 을 대부분 사람들 은 뿌리 부터 구두 이나 가늘다 하이힐 과 뾰 족 한 수족!하지만 최근 의 흐름 이 이미 이 가 벼 운 형태 로 단독 평탄 편안 부츠 ugg 부츠!지난 10 년 간 그대 와 그 를 통 해 들 어 보지 못 ugg 부츠 를 다 해서 놀 랄 일 은 아니다, 이 는 잘못 이 아니 란다

[copie borse]

Your article really amazing so I look forward to other updates in the near future.

[Ed Butowsky Personal Investing]

Those examples do not prove that forecasts about China’s future growth.

[coach outlet store]

what you have said in this article has been deeply interest me and i reall like your subject and wish you can write more

[top investment banks india]

thanks to share your Banking Experience with us. we have also very good Experience & information about top investment banks India. If you want know more about investment then please visit: http://www.violetarch.com/

[Zaney Cook]

It seems to me, the opinion is China is at an economic crossroads and is working on privatizing since businesses are state owned which lends to a more controlling situation over workers and the nation, then I am at a loss as to why Romney mention to the press that America should borrow monies from China and use it, as Romney seems to suggest for military purposes aimed at China. Is this a statement from a seventies idea of things, for the ongoing relations this country had with China, from the opposing side of friendship with China that Romney is borrowing or his solution to overseas issues,for the 21st century, that in my personal opinion will start an international incident. Wouldn't most nations take it as a slight I know I would and have. It seems that people have invested my way not to stand for advocacy groups but to still descriminate on the basis of race and religion which I thought was against federal laws and going against the equal opportunity laws that were place under Federal Communication laws. Misrepresenting companies to make a point by the old guard who do not want computers and those making a point toward a Japanese American Buddhist, keeping one from housing and jobs, which I thought we were all with integrity , Buddhists and other peoples , speaking out against oppression.

I do believe , as I have felt, that China would definitely take it as a slight.

And Romney is an indication of what we may have as the Republican roster.

We may need to all pray more, for better candidates. I surely miss the moderate Republicans.