Will China Overtake Us? Posner

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.

Comments

[Jack]

Yep! Just as with the huge US GDP and import/exports a 7% growth rate in either GDP or trade means a doubling each ten years. China may find the next doubling possible but each following doubling is most likely to take much longer.

The US enjoyed a great advantage as nations destroyed in WWII (most of 'em) were great markets that gave us little competition. Today, part of the "answer" for the US is that of growing exports, and it is the same for every developed or emerging, but troubled, nation. In short, China won't be playing ball against the farm leagues but against increasingly mechanized and savvy nations.

They are already on a path to lessen their self-dealt currency advantage and with most of the advanced nations repeating the history of the 1930's I doubt China's currency fiddling will be tolerated much longer.

Posner also "gets" the potential for instability. Yep! when you've a "benevolent dictatorship" there's always the "Russian roulette" of drawing a nut-job just when you needed it least.

[Adam Minter]

I would feel better about this analysis if it weren't so thoroughly lacking in appreciation for the actual situation on the ground in China. Walmart has a major presence in China, as does the French retailer Carrefour, the Swedish retailer Ikea, and many, many smaller retail outlets ranging from Tiffany to Carl's, Jr. Their intended market is the growing ranks of middle class Chinese eager to spend the excess income that they've earned - and thus all of these retailers continue to expand their presences. To do so, they rely on logistics as complex and robust any that might be found in the US, and increasingly benefit from expanded consumer credit.

Anyone who suggests a "scarcity of retail outlets" in China hasn't taken a look at the statistics on investment in new shopping malls, nor visited one on a Sunday. It is, I can assure you, reminiscent of the day before Christmas in America.

There are plenty of reasons to believe that China's growth will stall in coming years. But most of those outlined by Posner in this piece simply aren't applicable to China. The situation is far more robust than he apparently understands.

[Curt Doolittle]

I agree.

But neither you nor Becker extend your civil reasoning to geopolitical matters. (For some reason I don't really understand, that's fallen out of favor in western intellectual discourse -- probably due to post-colonial, post-world communist, present-islamic-radicalist guilt. But it is not out of favor in the developing authoritarian world.)

Countries with military strength under internal pressures externalize those pressures in order to create internal solidarity that overcomes corruption.

China gives every indication that they will do the same.

[Mitchell K.]

Posner writes, "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."

He makes an interesting point that the news media basically ignores. The Chinese government is notorious for misinformation on matters such as public safety (a fact not ignored by the American media). Yet the media does not seem to doubt what the Chinese say about their economic growth despite their reputation for duplicity. Perhaps it is because many journalists and other so-called experts subscribe to the view that China will overtake America the same way they once thought that Russia would or Germany would or Japan would (with all due respect to Paul Krugman), and the statistics help to validate their projections, biases, and fears.

The Chinese economy may very well continue booming and surpass all other nations in total output (it would not be surprising given its large and productive population), but no one really knows. Making projections into certitudes might help garner fame and attention for so-experts (with all due respect to Krugman and Paul Samuelson), but modesty does much more for one's credibility. The Becker-Posner blog is evidence of that.

[Anonymous]

I agree with Becker's point about inefficiencies of large SOEs and competitive disadvantages of private companies.

But I find it difficult to understand why the words by a judge/economist who has never been to China are more creditworthy than "Chinese economic statistics." (I am not saying the Chinese government is always honest on these matters, but it is fair to question someone's credibility when he says "imagine what a difference Walmart would make in China.")

Why imagine? Why not just google up "Wal-mart in China" and see what one can find: http://www.wal-martchina.com/english/walmart/wminchina.htm

[NEH]

"Naive extrapolation". I like that phrase. ;) Any type of peering into the future requires a certain amount of it. Whether it uses modeling based on Historical Analysis or the use of the latest and greatest mathematical tools and analysis. But something has to clear the clouds and fog obscuring the Crystal Ball.

As for China overtaking the U.S. economically - Perhaps, then again, perhaps not. What is known, is that we must look to our own National interests and take the necessary actions and steps to secure our own Economic future irrespective of China...

[Terry Bennett]

In between the Soviet and Japanese predictions, let's not forget the Saudis. They also were supposed to make us their economic be-atch, and they actually have been soaking up a staggering amount of our wealth ever since the 1973 embargo - yet they are still not a serious country, for whatever reason.

I am continually impressed with the pro-capitalism values espoused in Chinese culture - and my father-in-law is one of them - but they too will hit a wall soon enough, as pressure builds to dilute their new prosperity across their enormous subsistence class. Their growth right now is due to cheap labor and lax regulation. Once those advantages start to wane vis-a-vis our own environment, American producers will be able to exploit our inherent logistical edge - time zones, language, no ocean to cross, etc. - and take back our supply chain. In 20 or 30 years, China will be better off than it is now, but so will we. Not that I think it is important for us to dominate the world, but I expect we will continue to do so for the foreseeable future.

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Will China Overtake Us? which is good news for both the US and the Chinese people.

[NEH]

Terry, Isn't "Capitalism" and State owned and controlled financing, State Owned Enterprises (SOE's), and a State controlled and manipulated mercantilist operation an inherent contradiction? Remember, these guys are still "Communists" and the "Dictatorship of the Proletariat" is still the guideline and goal. ;)

[Jan]

China, Germany or Japan are very different mercantilist countries. But there is one common thing: High population density and natural resource scarcity. So at least for Germany, where I come from, politics care much about exporters competitiveness as raison d'etre. This sentiment might be another determinant of permanent trade surplusses.

For sure, I like to see much hidden interests regulation abolished. But most people think different. Eg. 80% of the voters in my home town rejected a reform of loss making public hospitals last month. People here accept world market competition but they strongly oppose local hospital competition. It's a funny similarity to hypercompetitive China with its privileged uncompetitive "state owned" enterprises.

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China would never Overtake Us, I live in China, you don't understand Chinese, but I know there are many problems in our China.

[Terry Bennett]

NEH,

When I speak of China, I ignore the government, which is not only a contradiction but an irrelevant aberration. The people are where the action is. My wife is one of 9 children, and at one point they were all self-employed. Where I see a traffic jam, she sees a market. It's impressive to watch their entrepreneurial values at work. Every Asian country has pockets of Chinese merchants, and they tend to be very successful businessmen. As the Chinese government lightens up on its agenda of repression, there will continue to be more and more hardworking and successful entrepreneurs at home.

However, the progress curve will be almost asymptotic, when they get close to their upper limit - even though right now it looks like a straight line upward. They aren't going to overtake the US.

[NEH]

Terry, The Government is "irrelavant"? How do you explain Mao's "Cultural Revolution" or more recently, "Tianamen Square"? Hopefully, time will tell. As it stands, I'm going too stick to my "Dictatorship of the Proletariat" view. ;)

[TANSTAAFL]

NEH is -- dare I say it -- making some sense. Just do away with the scare quotes and call the "Communist" PRC what it is -- a Communist dictatorship.

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Do you know that, we don't care whether China will overtake America. Once we stronger enough, will still have people argue here?

[Terry Bennett]

NEH, perhaps my choice of the word "irrelevant" is wishful thinking. What I mean to convey is that the recent success of China is despite their government rather than because of their government. If you are standing on my hand, and then you stop standing on my hand and I am able to use my hand to build a building, it is hardly fair for you to then take credit for the building. Under Mao there was almost total repression, and since he died there has been gradually less repression, which has permitted rather than caused the success. Imagine what these people could accomplish if they were to ever cast off repression entirely, unlikely as it is.

[Jack]

Some good comments!

Let's see if the giant turtle island of the US slogs along a the 3.5% we'd better achieve that's a doubling of our 15 trillion economy to 30 trillion in 20 years.

So the giant hare zips along at a sustained 8% rate? For a doubling of its $6 trillion economy in just nine years for $12 trillion. Then IF that much larger economy can sustain a 6% rate there's another doubling in 11 years to $24 trillion..... still a bit behind US $30 trillion and with their per capita income still about one quarter than of the US.

But! a world able to absorb today's percentage of exports from both the giants will be a very different world than that of today. And, if no such absorbtion no such growth?

Unless? both nations move away from the ALL FOR THE RICH model of today for a wealthy consumer society of far less income stratification?

[NEH]

Terry, That "free hand" may be able to build a Hooch and guide a water buffalo in a rice paddy, but to create a modern Heavy, Medium and Light Industrial base and Society requires much, much, more. Hence the "Dictatorship of the Proletariat"; do a Websearch. Even Wikipedia has a fair article on the subject. It even covers the subject of the concept of the "Withering away of the State"... ;)

[Terry Bennett]

NEH, I am pretty sure that if it were the proletariat doing the dictating, day-to-day life in China would be quite different. It sounds as if you are crediting the government with China's prosperity, whereas I am persuaded by the observed correlation between economic freedom and prosperity in their grand experiment. The minute they permitted some capitalism in the late 1970's, prosperity went up. The government simply announced that it would allow some farms to keep part of what they produced, and production promptly increased as much as 5000% on those farms. Encouraged, the government has since continued to offer more and more economic freedoms, and thus unburdened, the cultural instincts I so admire have come to the fore and driven China's growth, one entrepreneur at a time. What credit does the Chinese government deserve in all of this? They certainly aren't safeguarding the natural environment, or the work environment. They aren't providing much of a safety net. Rather, the country's economic prosperity appears to me to be directly proportional to the extent their government gets out of the way.

[NEH]

Terry, The Proletarian or Peasant, Industry and Agriculture? The rise of production and productive capability - is it due to the "Invisible Hand" or the "Withering away of the State"... ;)

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