Archive for the Category China


World Bank: China is now #1

Here’s what I said in 2012:

Each year I have done a post discussing the issue of when China will have the world’s largest economy.  Lester Thurow says it won’t be until the 22nd century; I say it may have already happened.

Just to be clear, there is no “fact of the matter,” just as there is no fact of the matter as to whether China or the US is larger in terms of square miles.  It’s what my students would call “merely a matter of opinion.”

And in 2009:

I think the best way to approach this issue is to use Rorty’s maxim “truth is what your colleagues let you get away with.”  Truth is socially constructed.  So imagine a timeline with a bell-shaped distribution above it.  The distribution shows the point in time when each economist thinks China has surpassed the US.  At the left end in 2010 is me, a China booster who (shamelessly) wants to get credit for being first to notice that America’s more than 100 year reign as number one is over.  The mode occurs when the World Bank says that China has achieved what Italians call “Il Sorpasso.”  And at the far right of the distribution, well into the 22nd century is Lester Thurow.  The mode occurs around 2016.  Mark your calendars.

The future is now.  The World Bank has (implicitly) crowned China for the (dubious) honor of having the world’s largest economy.  China declined the honor.

The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019.

The figures, compiled by the International Comparison Program hosted by the World Bank, are the most authoritative estimates of what money can buy in different countries and are used by most public and private sector organisations, such as the International Monetary Fund. This is the first time they have been updated since 2005.

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In 2005, the ICP thought China’s economy was less than half the size of the US, accounting for only 43 per cent of America’s total. Because of the new methodology – and the fact that China’s economy has grown much more quickly – the research placed China’s GDP at 87 per cent of the US in 2011.

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With the IMF expecting China’s economy to have grown 24 per cent between 2011 and 2014 while the US is expected to expand only 7.6 per cent, China is likely to overtake the US this year.

The figures revolutionise the picture of the world’s economic landscape, boosting the importance of large middle-income countries. India becomes the third-largest economy having previously been in tenth place. The size of its economy almost doubled from 19 per cent of the US in 2005 to 37 per cent in 2011.

The India figures are also interesting, as in the second link above I suggest that India will have the world’s largest economy within 100 years (later I said 50 years.)

When I first read Lester Thurow saying China wouldn’t be number one until the 22nd century, I recalled his earlier praise of Japan (which I thought was wildly excessive.)  Now he was far too pessimistic about another rising Asian power.  I wonder what his views are on India?

Just to head off some tiresome comments:

1.  Yes, there is a big difference between total GDP and GDP per capita.  One matters more for things like impact on commodity markets and carbon emissions, the other matters more for the location of industries like Silicon Valley and Wall Street, or military prowess.  Germany has a bigger GDP that Switzerland, whereas Switzerland has the higher per capita GDP.  Both facts are very important, but in completely different ways.

2.  China is neither a big success story nor a big failure.  It’s a huge country gradually shifting from catastrophically bad public policy to mediocre policy.  It’s a work in progress.

3.  All generalizations about China are wrong.  Well, . . . all but one.

Lessons?  I need to be bolder in my predictions.  I thought the 2016 forecast was getting out way ahead of the curve.  But the World Bank surprised me.  Kudos to that organization for making a sensible PPP comparison.  

Don’t feel bad Americans!  You were the biggest for 142 straight years.  Now you can gradually settle into playing the sort of role Greece played to Rome, or Great Britain to the US.  Soon the rest of the world will be taking potshots at China, and ignoring the US.  Anonymity can be sweet.  When was the last time terrorists went after New Zealand?

After all, why do you think China declined the honor?

Goodbye BRICS, hello IndoAsia

I never really bought into the BRICs concept.  It’s a hodgepodge. Brazil and Russia seem closer to Mexico and Turkey than to India and China.  But it did capture the growth spurt in the emerging markets after 2000.

To me the real story was China and to a lesser extent India.  And now the NYT says China is beginning to shift to a new trajectory:

Rocketing wages and benefits reflect an acute shortage of manufacturing labor, as a younger generation goes to college instead of heading for factories and as rural China has mostly run out of young adults to send to the cities.

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The trade gains for China are magnified because over the last several years many companies have shifted the production of components from high-wage Asian countries like Japan and South Korea to China itself. So China is producing more of the value in each product, and not just doing the final assembly of products produced elsewhere.

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In separate interviews this week with nearly a dozen Chinese exporters, at Hong Kong trade fairs or by telephone, all said that their biggest problem lay in labor: finding enough blue-collar workers and paying for their soaring wages.

Mr. Cheng said that a decade ago he paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, he said, his 200-worker business, the Hangzhou Luyi Arts & Crafts Company, pays $570 a month plus $100 a month in government-mandated benefits.

That works out to compensation roughly three times as high as in Indonesia, four times as high as in Vietnam, five times as high as in Cambodia, and as much as 10 times as high as in Bangladesh. But all of those countries have other problems, such as overburdened, unreliable electricity grids, which force companies to install costly generators and buy expensive diesel instead.

Like many companies in China, Hangzhou Luyi has responded to surging wages with increased investments in automation.

So what does all this mean?  First of all Chinese labor costs will continue soaring if China follows the path of South Korea and Taiwan, which seems likely to me, but not certain.  So what then?  Who makes the world’s sneakers in 2030?

Latin America is already a mature economy.  Mexico will keep growing, but it doesn’t have global implications.  Africa will grow with a commodity model, manufacturing will come later.  The Middle East is only good at doing two things, producing oil and fighting.  The developed world is already developed.  That leaves places like this (data from The Economist):

Country      Population   GDP (PPP) per person    RGDP growth/2014

Bangladesh     157 m              $2130                           5.7%

India             1,260 m            $4350                           6.1%

Indonesia       253 m             $5470                            5.4%

Philippines      108 m             $4620                            6.6%

Vietnam         91 m                $4020                           5.5%

That’s 1.87 billion people.  Throw in a bunch of similar smaller places like Sri Lanka, Cambodia, etc., and you have 2 billion out of the global population of 7 billion.  By comparison developed East Asia plus China has roughly 1.5 billion, the Western developed world 1 billion, Latin America 1/2 billion, sub-Saharan Africa 1 billion, and the other billion in places like the Middle East, Pakistan, Russia, etc.

Unlike the BRICs, it seems to me that IndoAsia is an actual category of similar countries.  It’s the next China, but it won’t be as dynamic as China.   I tried to come up with a clever acronyn for those 5 countries but failed.  In any case, they share pretty similar GDP growth rates and income levels (except Bangladesh for income.).  And while China’s population will soon start shrinking, they will keep growing.  IndoAsia will have the young workers of the 2030s that will produce all that cheap stuff that used to be made in China.

If you believe that China depressed wages in the West, do much higher wages in China make that problem go away, or does it simply shift to IndoAsia?  I can see arguments both ways.  IndoAsia has enough labor to pick up the slack, but does it have the productivity to depress US wages?  It seems to me that by the time Bangladesh gets to the point where it could threaten the US autoworkers, those workers will be replaced by robots and 3D printers anyway.  So my hunch is that IndoAsia is a nonissue for US inequality going forward.  It will be increasingly the case that most US workers do things that need to be done in the US for various reasons, or where we have strong productivity advantages.

Also note that these countries are growing at 6%, not the 10% that China grew when it was that poor.  That suggests they’ll get stuck in the middle income trap unless they do more reforms.  Or perhaps I should say until they do more reforms.  In the very long run all countries may escape the middle income trap, the question is whether in the interim they go through decades of mediocre growth like Latin America.

China: The problem is easy credit, not easy money

Tyler Cowen linked to this interesting NYT story:

HONG KONG — Move over, Janet Yellen and Ben Bernanke. Step aside, Mario Draghi and Haruhiko Kuroda. When it comes to monetary stimulas, Zhou Xiaochuan, the longtime governor of the People’s Bank of China, has no rivals.

The latest data released by China on Wednesday shows that the country’s rapid growth in money supply has continued. Mr. Zhou and his colleagues at the Chinese central bank have only begun the difficult and dangerous task of reining it in.

The amount of money sloshing around China’s economy, according to a broad measure that is closely watched here, has now tripled since the end of 2006. China’s tidal wave of money has powered the economy to new heights but it has also helped drive asset prices through the roof. Housing prices have soared, feeding fears of a bubble while leaving many ordinary Chinese feeling poor and left out.

.   .   .

This means the money supply is still charging well ahead of inflation-adjusted economic growth, which has been about 7.6 percent; the exact figure for the fourth quarter of last year is scheduled for release on Monday.

Growth in M2 almost reached 30 percent at the end of 2009, when China was using monetary policy to offset the effects of the global financial crisis. China has reduced the pace of money supply growth since then, but kept it well above the pace of economic growth throughout, which means it has done little to sop up the extra cash issued during the crisis.

The question now is whether the central bank can further slow the growth of credit and the money supply without causing a slump in housing prices or a sharp slowdown in the credit-dependent corporate sector. Even the very modest slowdown in money supply growth so far has already contributed to two sharp but short-lived increases in interbank interest rates in June and December, which roiled markets in China and around the world.

China’s central bank “is in a very difficult situation; it needs to tighten but the whole system is not used to tightening, they are used to money printing,” said Shen Jianguang, a China monetary economist in the Hong Kong office of Mizuho Securities, a Japanese investment bank.

M2 encompasses money in circulation, checking accounts, savings accounts and certificates of deposit. It is the main money supply indicator watched by the People’s Bank of China in trying to balance the need for economic growth with the dangers of inflation.

M2 has grown so fast in China not just because the central bank has been issuing a lot of renminbi but also because the state-owned banking system has lent and relent those renminbi with encouragement from the government, creating a multiplier effect.

China has also undergone a financial liberalization in the past five years that has accelerated the pace of lending. An extensive and loosely regulated shadow banking system has emerged, partly because of the willingness of regulators to allow banks to classify loans to new financing companies not as corporate loans but as interbank loans, for which little capital needs to be reserved.

.   .   .

Consumer inflation has not yet become a big problem in China: Falling commodity prices and widespread manufacturing overcapacity held down consumer inflation to 2.6 percent last year.

This is what happens when a journalist confuses money and credit.  Monetary policy is not especially easy by Chinese standards.  Yes, NGDP growth is running around 10%, but that number is down from previous decades.  Even if the number is too high (and it probably is) it’s changes in the rate of NGDP growth that really matter.  A NGDP growth rate that is gradually slowing year by year does not causes rapid RGDP growth in China.  It’s productivity growth that explains the China boom.

Now when we turn to the broad M2 “money supply” we are actually looking at credit, not money. This is a completely different issue.  I’d expect credit to grow faster than money in a developing country like China, but even so, I think it quite likely that credit growth (and hence M2 growth) is too rapid. The moral hazard problem in China is an order of magnitude worse than in the US.  This means there is a lot of misallocation of resources by the big banks.  Too much housing and infrastructure construction in secondary cities, for instance.

But the solution is not “tight money,” which would simply cause another sort of misallocation of resources.  Instead of too much construction you’d get too much leisure time, aka unemployment. The solution is a tighter credit policy, not tight money, which is of course politically difficult to do under the Chinese economic regime.  This is why they need to reform the banking system by making it less bad.  Adopting the horrible US banking system would be a huge improvement for China.  The Canadian system would be far better.

For the moment they’ll stick with their current system and continue to misallocate resources.  At some point there may be a tipping point and they’ll get a little bit of stagflation if they are lucky, or mass unemployment if the follow the BOJ/Fed/ECB playbook.  Let’s hope they keep NGDP growth stable and opt for stagflation.  Or better yet market reforms.

PS.  I have a post offering half-hearted praise to Keynesians, over at Econlog.

Average isn’t over in China

Good news:

In the same week that international educators are debating the comparative merits of global school systems—and whether China’s PISA scores are overhyped—a new report from China Economic Quarterly sheds light on an unintended consequence of China’s recent push to expand higher education.

The annual supply of fresh college graduates far exceeds the number of white-collar positions available in China. Meanwhile a dwindling pool of young people willing to work in Chinese factories has driven up assembly-line wages. The result, conclude GK Dragonomics analysts Andrew Batson and Thomas Gatley, is an unexpected narrowing of China’s worryingly high level of income inequality.

Over the past decade, China has rapidly expanded access to higher education. University enrollment tripled from 2000 to 2010, from 2.2 million to 6.6 million students. Unfortunately, job creation didn’t keep pace. According to survey results from China’s labor ministry obtained by China Economic Quarterly, there were 100 job applicants in mid-2013 for every 80 white-collar jobs in China. For blue-collar positions, however, the scenario was reversed: There were 100 applicants for every 125 slots in China.

Given the relative oversupply of college graduates and undersupply of lower-skilled workers in China, blue-collar wages have risen more quickly than white-collar wages for the past four years. Since 2009, professional wages have climbed 12 percent annually, on average. In the same period, average wages in manufacturing, agriculture, and construction have risen 14 percent annually.

The upshot? “All the data show households with humbler jobs and lower incomes enjoying faster income growth than those with fancier jobs and higher incomes,” observe Batson and Gatley. “China’s income inequality has been quietly getting better.”

Someone tell the Pope to stop being so Euro-centric.  Markets are making the world a better place, a more equal place.  But the world still needs to become much more market-oriented, as there are still lots of very poor people.

Why Swedish schools are better than Finnish schools

(Alternative title; why finishing schools are better than Finnish schools.)

When left and right-leaning economists agree on something you can usually be pretty sure it’s true.  But education is different.  Both sides seem to agree that the point of schools is learning academic material, and that test scores tell us something useful about whether schools are successful.  That’s wrong, and it’s a particularly unfortunate error by conservative economists, who are supposed to believe in the market test. It’s like saying a Cadillac is better than a Mercedes because it has a bigger engine, even if the Mercedes sells for $10,000 more. Economists are blinded by the fact that they themselves are educators.  They are biased.

I’ve often argued that the only reliable test of schools is the market test—which schools are more popular at a given price point.  Tyler Cowen linked to a study that obliquely relates to this issue.  It shows that South Korean students are the least happy students in the world.  Finland’s students are near the bottom, and are the least happy of any Western European country.  In contrast, South Korea usually scores at the top of “education rankings” based on test scores, and Finland is often in second place.

It’s interesting to compare Finland with its neighbor Sweden.  Based on test scores Sweden has the worst schools in Western Europe, even worse than America’s K-12.  Horrible schools.  But their students are above average in happiness, far above Finland.  What explains that difference?

One reason might be that Sweden has a 100% voucherized school system, so schools have to cater to parents.  Now I don’t mean to suggest that schools in Sweden are perfect—Swedes have told me the legacy of the old socialist system hangs on to some extent, and most students still go to state schools.  Still, the vouchers are gradually forcing the schools to conform more to customer preferences.

Some might argue that high test scores are needed to produce the sort of highly-skilled workers needed for the modern economy.  That’s false, and Sweden proves it.  Its workers are more productive than Finnish workers because test scores tell us little about productivity.  The girls and boys who will work for Nokia and Eriksson get the math they need in either country.  But for the other 98% of students all that useless solving of equations or proofs of triangle relationships is a waste of time, they’ll never need it.  (I’m now having to struggles with helping my daughter solve her 9th grade math problems, so perhaps I’m biased.)

Since test scores don’t matter, we should focus on giving students the basics, and otherwise make schooling a more pleasurable experience.

PS.  Just to be clear I don’t mean to suggest that test scores are uncorrelated with economic success.  They clearly are correlated.  But the Swedish/Finnish case suggests that we’ve misinterpreted the causation. Most likely the sort of society that is so obsessed with success that they produce a South Korean-type school system will be successful for other reasons, having to do with cultural attributes.

You certainly need a basic level of education, with extra learning in specialized fields, to run a successful modern economy.  Sweden does that.  However you don’t need high average test scores.  The US, another lowly performer on tests, also has much more productive workers than South Korea.

If you apply my South Korean (causality) reasoning to this article on Shanghai, you will better understand why I think it very unlikely that China ends up stuck in the middle income trap:

Shanghai’s students came top of the global class in maths with an average score of 613 (up from 600 in the last PISA tests in 2010). That was 119 points, or the equivalent of nearly three years of schooling, above the average and placed Shanghai 25 places above Britain.

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Kong Lingshuai, a professor who has studied Shanghai’s PISA successes, said the secret is mix of “traditional elements and modern elements”.

The “traditional elements” relate to the high expectations of “tiger” parents and a belief instilled in Chinese children from a young age that effort is crucial to gaining a good education.

“Chinese parents pay great attention to their children’s education in the hope that their sons will one day become dragons and their daughter phoenixes,” says Prof Kong, from the College of Education at Shanghai Normal University.

The “modern elements” include Shanghai’s willingness to constantly adapt its curriculum and teaching practices, its focus on improving underachieving schools by pairing them with schools that excel, its openness to foreign ideas and the introduction of performance-related pay.

An obsession with training has also been key, says Prof Kong. From last year new teachers have had to undergo a standardised, one-year training course before starting in the classroom.

Once qualified, they are required to complete at least 240 hours training in their first five years. Teachers are also encouraged to attend each other’s classes in order to promote a culture of idea “sharing, exchanging and positive competition,” Prof Kong added.

Outsiders often dismiss China’s education system as a pressure-cooker-style frenzy of exams that places too much emphasis on rote-learning and does little to stimulate creativity.

But in Shanghai at least that may be starting to change. Authorities are attempting to move away from testing that relies too heavily on memorising facts or figures and some schools are also giving students more time to play, rather than just study.

Gao Xinhong, a Shanghai student who became a minor local celebrity after getting the highest marks in this year’s “gaokao” university entrance exams, said the city’s schooling system was becoming more flexible.

“The greatest part of Shanghai’s education system was that it gave me a broad perspective compared to other Chinese cities. Shanghai’s education is good because it does not treat grades as the only thing for a student,” she said.

Zhu Yi, the father of 10-year-old Amy Zhu, agrees.

“It is much better than before. Schools in Shanghai now focus on the all-round development of students,” said Mr Yi, a 44-year-old sports instructor.

You would never, ever, see that sort of article written about countries that have gotten stuck in the middle income trap.

Shanghai students are far happier than Korean or Finnish students.  Korea would do well to loosen up a bit. (And yes I know that Shanghai is a relatively affluent city, not a country, which largely explains its very high ranking.)