The Chinese Economy—Posner

A very poor country can grow rapidly, but a rich one cannot. The U.S. economy is very robust by international standards, but it rarely grows by more than 3 percent a year (except in the catching-up phase that follows a dip in the business cycle), and much of this growth is attributable to population increase; the U.S. has a relatively high birth rate and a high immigration rate. China grew at a very high rate, once it abandoned the communist economic system, from a very low base, but it is not surprising that the rate has slowed—yet slowed to a rate, still very high, of 7.7 percent in 2012. 

I don’t know what the future holds, but it wouldn’t surprise me if the Chinese rate of economic growth plummeted. There are many negatives in China’s economic picture. The obvious one is the state-owned enterprises, which account for about half of total Chinese output. They are inefficient and corrupt, but also deeply entrenched, with numerous links to the communist officialdom that runs the country. 

But there is also the uncertainty remarked by Becker that is created by China’s need to reduce the ratio of output that is exported and output that is consumed domestically, because increasing wages of Chinese workers have increased competition from countries where wages are still very low. The problem in reorienting an economy from producing primarily for export to producing primarily for the domestic market is that the sale of consumer goods requires an elaborate distribution infrastructure, a service culture, and a reasonably well informed consuming public, none of which is necessary for exporting and each of which is difficult to create. So China faces large restructuring costs in reorienting its economy to producing more for and selling more in the domestic market. 

China is experiencing a brain drain, though retarded at present by poor employment opportunities in Europe (owing to Europe’s economic misery) and good ones, still, at home. Many of China’s brighest, best educated young people do not want to remain in China, and are welcomed as immigrants by many countries, such as the United States, Canada, and Australia. One reason they don’t want to remain is China’s political system. China is a dictatorship, and in a dictatorship everything is subordinated to its maintenance. China not only is not democratic; it does not (as authoritarian regimes sometimes do—the Prussia of Frederick the Great is a famous example) protect personal liberties. China is also corrupt, increasingly militaristic, ethnically divided, hostile to minorities, and fearful of cults and religious sects. Its traditions, like those of Russia, are antithetical to the political and economic cultures of most prosperous countries. The negative features of Chinese society are relevant not only to explaining the brain drain, but also to judging whether its economy is likely to continue growing rapidly. 

Emigration of the young is further worrying from the standpoint of economic growth because, as a result of China’s “one-child” policy (albeit sporadically enforced), the population is aging rapidly. This both diminishes labor supply (and so forces up wages, reducing China’s international competitiveness) and diverts resources to supporting unproductive elderly persons. 

Another obstacle to continued rapid growth of the Chinese economy is the continuing rapid increase in the amount of pollution, which has already reached staggering proportions, beyond what developing countries usually encounter. As economic activity increases, so will the amount of pollution; to prevent it from getting altogether out of hand, China will have either to divert greater resources to pollution control, which will increase welfare but not measured economic output, or slow the rate of economic growth. 

Still another source of concern is the recent drop in China’s economic growth rate, from about 10 percent to 7.7 percent. That is a drop of almost 25 percent, which implies a significant drop in the return on investment, which in turn implies that investment will fall. Such a fall will increase unemployment. It may also put strains on China’s banking system (if firms that borrowed to invest have difficulty repaying their loans, because of falling output)—a system already reported to be heavily stressed. 

And finally I’m mistrustful of Chinese statistics. Should we trust economic reporting by officials of a dictatorship? I think not.

Comments

[Thomas Rekdal]

Judge Posner outlines, accurately enough, most of the negative factors affecting China's economic future. Most of them relate to imperfections in governmental structure and poor policy choices. Historically, this has always been China's dilemma: bad government (much of the time), magnificent culture (all of the time). It is no accident that all of the powers conquering China have eventually been absorbed into its culture. Nor that countries embracing a large overseas Chinese population find their economies enlivened.

There is something about Chinese culture that nourishes the entrepreneurial spirit, and something about the Chinese family that nourishes talent and saving. While family structures in the West continue to crumble, most Chinese families think of the next five generations, not the next five months.

No more than Judge Posner do I know what the future holds. But I would not bet against the Chinese culture. Ever.

[Terry Bennett]

Indeed, the Chinese are a breed apart - admirably so - but they are not infallible, and I do not think they are equal to their current challenges. If they haven't peaked already, they are near the top of their horizon.

The problem is the same one they've had for 50 years - overpopulation (although the dictatorship thing is also a big bummer). A middle class of a hundred million people sounds impressive, until it is put in the context of a total population pushing 2 billion. The enormous underclass will forever drag on the country as a whole, and I expect that even the impressive gains they've seen in the last few decades are somewhat illusory in that they probably won't ever translate onto the bulk of the population.

Under a more free and tolerant government, they might have a chance of exploiting their amazing work ethic and continuing their climb, but the combination of the repression and the outsized subsistence class is a knockout for them. If I had to bet, I'd say in 20 years China won't look much different than it does today.

[Neilehat]

The Chinese economic expansion slowing? Perhaps, we're witness to a classic example of the "Law of Diminishing Returns" at work. Only time will tell. The example and case study needs to play out further...

[GluckRadio]

I did a radio show with Martin Jacques and he talked abou this very issue - how American economic hegemony is on its way out to a global world of multiple leaders. The end of the Western world. Listen to it at GluckRadio[dot]com, episode 48. Let me know what you think.
This is a very passionate issue for me.

[B Wilds]

All booms start out legitimately but that does not prevent them from developing into bubbles that pop disastrously in the end. The bubble forming in China is no exception to this pattern. Fast growth can and does mask many ills.Central planning always sounds good, logically, it would seem reasonable and efficient, but it has an Achilles heal. Often companies intertwined with government run on razor thin margins, with creating jobs almost a priority over making a profit. This is an incubator for corruption. A fair number of articles were written on this subject in the middle of 2011, but concerns abated as central banks across the world unleashed massive quantitative easing. I suspect that the problems have not been corrected and the bursting merely delayed. I would also like to point out that China is an American product, by this I mean we developed the country as a counter weight to the Soviet Union, it looks like we may of done to good a job. More on this subject can be found on my blog site in the post below,

http://brucewilds.blogspot.com/2013/02/china-bubble-yes-it-is.html