Archive for the Category China


Either Lars or I am really, really wrong

I’ve argued that China is currently overtaking the US in the race to have the world’s largest economy, and will have an economy twice the size of the US within a few decades.  I’ve picked on Lester Thurow for claiming it wouldn’t happen until the 22nd century.  And now Lars Christensen has suggested it might never happen.  Those are fighting words to a Sinophile like me.  Here’s Lars:

However, the [World Bank] argument was completely bogus as it was based on Purchasing Power Parity (PPP) rather than on actual exchange rates (To be fair we should blame the media rather than the World Bank for this interpretation of the data).

PPP based measures of GDP (per capita) might make sense if we want to measure how much an average citizen can buy for given an average income, however, it does not make sense when we want to measure the size of the economy. There we have to use measures based on actual exchange rates and if we do that then it turns out that the Chinese economy is still significantly smaller than the US economy. Hence, total Chinese GDP today is around 10 trillion USD, while US GDP is around bn 17-18 trillion USD. Said in another way the US economy is still nearly double the size of the Chinese economy.

And what I will argue in this post is that China might never overtake the US as the biggest economy in the world.

I have several problems with this argument.  First, if Lars really feels PPP is wrong, and that we should use nominal figures, then he should not be talking about China having recently grown at 7 to 7.5% per year.  In PPP terms China may have been growing at 7.5% vs. 2% in the US, but in nominal terms the gap is far wider, due to the Balassa-Samuelson effect.  China’s real exchange rate has appreciated strongly over the past decade.  So if Lars is right that nominal exchange rates are the right test, then China’s been catching up to the US at a rate far faster than either Lars or I assume. And in that case China’s nominal growth could slow dramatically and yet still be growing far faster than the US (where trend NGDP growth is now about 3%, in my view.)  Lars avoids this problem by assuming the Balassa-Samuelson effect will suddenly come to a screeching halt, whereas I think the yuan is headed to 4 to the dollar.  He also assumes a 3% RGDP growth rate for the US, whereas I believe it will be closer to 1.2%, growing over time to perhaps 2% in a few decades.

My second argument is that it makes no sense to use nominal exchange rates to compare the size of economies.  Perhaps it makes sense if you want to look at the impact on global trade (China exports far more than the US, BTW), but surely not if comparing domestic production.  I recall the euro being about 85 cents around 2002, then by 2008 it peaked around $1.60.  And yet the US and eurozone had roughly similar NGDP growth rates over this 6 year period.  Does anyone believe that comparing non-PPP adjusted GDPs would have given a meaningful comparison of the relative size of these two economies?  Did the eurozone suddenly go from having an economy much smaller than the US to one far larger, in six years?

And consider the effect of tax regimes.  Suppose you adopt a VAT that provides revenue equal to 20% of GDP.  Your nominal GDP at market exchange rates will suddenly jump by 20%, even though nothing has happened to the real size of your economy.  Indeed the European VATs are one factor that explains why Europe often looks better against the US if you don’t adjust for PPP.

Switzerland’s nominal GDP per capita is $81,323, and Germany is $44,999. Here are three more:

Greece   $21,857

Taiwan, $20,930

Portugal,  $20,727

Now let’s go to PPP.  We find Switzerland at $46,430, and Germany at $40,007. Doesn’t that gap seem more plausible?  In PPP terms Taiwan has a bit under $40,000, whereas Greece is just over $24,000 and Portugal a bit over $23,000. Again, far more plausible.

Still not convinced?  China produced more cement in 2011-12 than the US did in the entire 20th century.

Still not convinced?  Think about the fact that China has 1.36 billion people while you read this:

CHINA Northern Locomotive and Rolling Stock Corporation (CNR) has been awarded a contract to supply a fleet of 60 driverless trains for the first metro line in Beijing to be equipped for Unattended Train Operation (UTO).

I’m telling you, this country isn’t messing around.

For Lars to be right, China’s nominal GDP per person would have to get stuck at Brazilian levels.

Ladies and gentlemen of the jury, I rest my case.

PS.  Under PPP Denmark drops from over $59,000 to under $38,000.  Maybe that’s why Lars likes the unadjusted figures.  :)

About those struggling middle class Americans

I’m a bit of an extremist on saving.  That partly reflects my supply side views—government policy discourages savings in 100s of ways.  It partly reflects the fact that successful economies like Singapore and Switzerland tend to save a lot.  And it partly reflects my (patient) personality.  I’ve been in all 5 quintiles at various stages of my life, and can always save money at any income.

I often get into debates with commenters, and eventually it reaches the point where I’m told Americans are too poor to save.  I don’t get it. Isn’t America the richest country in all of world history? How can we not afford to save?  It also makes me think of my frequent trips to China, where people earning about $10,000 on average are able to save 50% of their incomes.

Lots of our economic problems, from excessive health care costs to excessive student loan debt to the housing crisis, are partly caused by insufficient saving.

Now Businessweek reports that even most “upper-middle-class Americans” don’t save anything:

Just 45 percent of upper-middle-class households (income from $75,000 to $99,999) saved anything in 2012, according to the Fed study. That means the other 55 percent didn’t save for a house, retirement, or education. About 16 percent spent more than they earned and went further into debt.

Now you might object that a family making $80,000 or $90,000 a year isn’t really “upper-middle-class.”  It’s middle class.  And I’d agree with you.  But I’ll only agree with you if you agree that this shows the income distribution data doesn’t show what most people assume it shows.

To be fair, the income distribution data used by the right is often just as meaningless.  Remember hearing about all those people who “escape poverty?”  Lots of them are like me—struggling grad students moving up to fat and happy professional careers. The NYT reported that 73% of Americans spend part of their life in the top 20%.  What’s the matter with Kansas?  No, what’s the matter with intellectuals who don’t understand why average Americans don’t favor higher taxes on the top 20%.

PS.  I recently did a post comparing Brazil and China.  If you wonder where all that Chinese saving goes, check out this map provided by Matt Yglesias, which compares growth in the Rio and Shanghai subway systems since 1993.  By 2025 Shanghai’s will probably double again.

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Of course not all the Chinese saving is invested wisely.

PS.  The Yglesias post has some other interesting graphs.

Brazil on the short end of a 7-1 score

In economic growth and development there are mysteries that get a lot of attention.  And then then are deeper mysteries, the puzzling lack of puzzlement over certain facts.  Brazil is a country that has always puzzled me a bit.  Here’s a recent article from the Economist:

The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month 11.4% were more than 30 days behind on their debt payments, up from 9% a year earlier. Retail sales have flagged.

Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October. In an effort to prevent voters from feeling the pinch, Ms Rousseff has loosened the fiscal reins. In May public spending was 16% higher than a year earlier and revenues 8% lower. As a result Brazil posted its second-worst monthly primary budget deficit (ie, before interest payments) ever. “They are trying to mask the problem until after the election,” says Ms Maurício.

I checked online and it looks like Brazil has averaged 1.5% RGDP growth over the past 3 years.  In contrast, RGDP in China has been rising at about 7.5% per year. In per capita terms that’s a roughly 7-1 advantage to China.  Ouch.  (Sorry to my Brazilian readers for mentioning 7-1, but I just couldn’t resist.)  What could explain such a vast difference?

1.  Perhaps it’s because Brazil is about 20% to 25% richer, and richer countries tend to grow more slowly.  But that would explain only a slight difference.  Both are solidly middle income countries, thus the two growth rates should not differ that much.

2.  It sure doesn’t seem like “austerity” can explain the slow Brazilian growth.  Indeed the article suggests that fiscal policy has been expansionary.

3.  The business cycle?  Perhaps, but the unemployment rate is described as “low.”

4.  Ethnic differences?  Possibly, I’ve argued that for cultural reasons North Korea would have a much easier time growing 10% a year for 30 years in a row than Afghanistan or the Congo.  (Assuming North Korea adopted capitalism.)  But even so, I still have doubts about the ethnic argument.  Here’s a comparison of the US and Brazil:

Brazil:  48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.

USA:  62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American

The US has fairly wealthy states like California and Texas where the white population is less than 50%.  I’m certainly not saying ethnicity has no role in the wealth differences, but the IMF estimates Brazilian per capita GDP (PPP) at $12,200, compared to $53,100 in the US.  That gap seems way too wide to be explained by the ethnic/cultural differences between the US and Brazil.  Even black and hispanic Americans have average incomes at least double the level of Brazil.

5.  Government policies?  Brazil does have a big government, at least for a developing country.  Government spending is 39% of GDP, which is considerably higher than other Latin American countries.  As a libertarian I’d like to pin all the blame on that data point, but of course many of those other Latin American countries with “small government” are also quite poor.

6.  If not size, then perhaps quality of government?  The Heritage ranking of economic freedom puts Brazil only 114th in the world, which is below average.  But China is #137, which is even further below average.

7.  The one thing that really stands out with government is that Brazil spends lots of money on pensions and not much on infrastructure.  And China spends LOTS of money on infrastructure, and spends it reasonably efficiently.  (China does build some unneeded infrastructure, but they also build a lot of needed infrastructure, very quickly and at low cost.)

The last item is the one I find most plausible, but even I don’t think it can come close to explaining the 7-1 growth gap between Brazil and China.

And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state.  Why this continual hyping of Brazil as the country of the future?  Recall it’s one of the original BRICS.  Here’s Bill Clinton in 2012:

Clinton, speaking at a forum of bankers in Sao Paulo, acknowledged some problems but said Brazil still “looks really good” compared to crisis-ridden economies in Europe and the United States.

He said Brazil also compared favourably to India, which is struggling with a stagnant economic reform agenda, and China, which has tensions with some of its neighbours and is at risk of suffering from water scarcity and other depletion of natural resources, he said.

Remember that Brazil is a sophisticated country that has been exporting products like commuter airliners to the US for many years.  They have a huge internal market and a fabulous agricultural sector. Waterpower and lots of resources.  Modern big cities.  We aren’t talking about Lesotho or Laos.

And their per capita income is $12,200 and going nowhere.  It’s a mystery to me. And it’s also a mystery as to why they get such a good press.  Why aren’t they expected to grow like China?  The soft bigotry of low expectations?  Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen? What do you think?

PS.  Paul Krugman recently had this to say:

You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.

Brazil has tried that approach under the new government (and the previous center-right government as well), and in fairness inequality has fallen somewhat.  But I just don’t see the growth payoff.

Asian values

Here’s an interesting news story:

New revisions to the code of behavior for primary and middle school students no longer require them to “love the Chinese people and love the Communist Party of China (CPC).”

.   .   .

As well as taking out the demand to love the Party and the public, the new code has also erased general phrases about self-respect and confidence and replaced them with more specific directives.

Meanwhile, more specific rules have been added. For patriotism, the code now states that students should be aware of Chinese history and salute at flag-raising ceremonies.

Students are required to practice garbage classification and live a low-carbon life, while the new code also prohibits them from smoking and drinking as well as Internet abuse.

It also encourages students to express their opinion and listen attentively in class.

The MOE launched the revision work on the code of behavior in 2012, starting a public debate. The current code, published in 2004, was deemed out of date and impractical among many Net users, especially after comparison with students’ codes of behavior in other countries that emphasize self-protection rather than patriotism or loyalty to the Party.

From Mao Zedong to a low carbon life in 50 years.

And here is a very interesting excerpt from Micklethwait and Wooldridge’s excellent new book on governance:

The regime’s enthusiasm for meritocracy has deep roots: Chinese parents have been telling their children for more than 1000 years that “those who work with strength are ruled. Those who work with their minds manage others. Those who excel in scholarship become officials.” Polling indicates that most Chinese like the idea of being ruled by a wise guardian class.  The worship of intellectual prowess helps.  This is a country where infant formulas are routinely packaged to tiger moms as “brainpower boosters” and McDonald’s Web site features a professor Ronald who offers happy courses for multiplication and language learning.

It is not hard to find examples of the way that bright young people, carefully selected and promoted, are tackling big problems. In Shenzhen a young civil servant called Ma Hong is doing what David Cameron tried to do in Britain: build a big society by getting nongovernmental organizations to deliver public services, mainly care for the elderly. She has dismantled most of the controls on local NGOs, so all they need to do is register with her. By mid-2012 she had brought in more than 5000 “social groups” and paid out several hundred million yuan to them to perform social work. All the groups are evaluated by third parties on things like corporate governance: the higher their rating the more money she trusts them with.  By 2012 she had closed down twenty-six NGOs and warned seventy others that their internal standards were not up to par.  Already her model is being copied around the country.

Ma epitomizes the businesslike way in which China’s best civil servants are trying to tackle social problems. Her starting point is to look around the world at what works. She studied in Hong Kong in 2005 and noted that some 90% of social work was done by NGOs, paid for by the state.  She is also an admirer of Singapore and has borrowed its balance between easy registration for NGOs and stern punishment for underperformance. She wants her social groups to become the engines of Chinese society, “just as private companies are in the economy.” Indeed she thinks that the public sector needs to be changed in the same way as the private sector, with the state creating the right environment for companies and charities to do more of its work. “We are in a transition from a big state to a small state,” she says, “and from the small society to a big society.”

Notice the strange mixture of top-down elitism and Hayekian bottom-up self governance.  We need to think about these issues in more than 2 dimensions.

China on the home stretch

When I started studying economics (1973) you’d read stories about how China’s per capita GDP was about $100.  Then a few years later it would be $200, then $400, then $800, then $1600, then $3200, then $6400.  Some of that is inflation, but you get the idea.

Now the IMF has China at about $10,000 and the World Bank says $12,000.  In comparison, places like Japan, France and Britain are all around $36,000.  China is 2 more doublings away from being a rich country.  This tells me that the next two decades will be crucial.  One of two things will happen, either of which would dramatically affect China:

1.  China quickly becomes rich (and probably democratic.)

2.  More likely, China’s growth slows dramatically.   They still become rich, but it takes more than 2 decades.

Westerners often frame this issue in terms of politics.  Will China become democratic or will the Communist Party hang on to power?  Why does it have to be an either or choice?  Singapore seems to be the model for many Chinese policymakers, and in that country the quasi-dictatorship keeps winning elections as the political system becomes increasingly democratic.  This is probably the long term goal of China’s leaders (although I’m not at all confident they will succeed.)

Tyler Cowen linked to an excellent essay that discusses how economic forces are pushing the government toward a shift in the economic model.  Michael Pettis has been talking about this problem for years.  The old model simply won’t work much longer. After reading the first link, consider the political angle discussed in this news story:

President Xi Jinping told top officials he was disregarding “life, death and reputation” to fight corruption in a terse speech signalling a possible dispute and doubts among party elites over the campaign.

An official mainland newspaper and a person familiar with the matter confirmed the president’s statement.

Xi was believed to have made the remark in a closed-door Politburo meeting on June 26, the details of which were publicly revealed only when the city newspaper Changbaishan Daily on Monday reported that local officials received instructions from the president.

”[I] had left life and death, as well as my personal reputation, out of consideration in the combat against corruption,” Xi said, according to Changbaishan city’s party chief, Li Wei.

Li said the top leadership’s remarks emphasised a sense of crisis, and some of the words were “shockingly” sharp and harsh. However, he did not provide more details.

.  .  .

The Changbaishan Daily also said that Xi urged graft busters to focus on four types of officials: those who are strongly opposed by the public; those who have not restrained themselves after the party’s 18th congress in 2012; younger cadres in key positions; and those who might potentially take on more important roles.

The daily’s article was soon deleted from the website as some internet operators said they received a gag order from propaganda authorities.

A person familiar with the president’s speech told the South China Morning Post earlier that Xi made the strongly worded speech to the Politburo to counter some critics and silence doubts against his anti-corruption campaign.

Xi warned the party elites that nothing would be off limits in his anti-graft drive, the person said.

The president also rebuked the “school of thought” that the relentless drive against errant officials would only plunge the country in chaos and that Xi, in the end, would “eat humble pie”.

According to the person, Xi retorted: “What is there to be scared of?”

Zhang Ming, a political scientist at Renmin University in Beiing, said the remarks showed the anti-corruption campaign had certainly threatened some interest groups in the upper echelons.

”The combat between Xi and the interest groups has been white-hot and Xi also realised that [it] is make or break,” he said.

I think the best way to read this is not to focus on the veracity of Xi’s claims, but rather the purpose that is being served by this statement.  Especially by the fact that it was published.  It seems pretty obvious that Xi is much more of a politician that Hu Jintao, everyone agrees on that point.  My impression from talking to Chinese people is that Xi’s anti-corruption campaign is very popular. There’s a lot of resentment at the lavish lifestyle of corrupt officials.  Westerners often view China as being “corrupt”, but it’s also worth noting that Chinese culture puts a lot of emphasis on the importance of merit.  As we’ve seen in Singapore, Chinese culture is also consistent with a strikingly non-corrupt bureaucracy, a meritocracy.  In a political sense, China is up for grabs.  As an analogy, both North and South Korea are in some sense embodiments of “Korean culture.” Ditto for Mao’s China and capitalist Taiwan.  Culture is surprisingly plastic in some dimensions, less so in others.

China will probably start moving toward democracy long before it becomes democratic in the Western sense. It seems to me that Xi’s speech should be viewed as a sort of campaign speech, trying to position the Communist Party, or at least his wing of the Communist Party, in the way that Lee successfully positioned the ruling party in Singapore.  If there is to be a battle, Xi wants the public on his side, especially the 90 million members of the Communist Party (most of whom are average urban residents.)

PS.  Tyler also linked to a review of a book on Chinese minorities, which seemed somewhat misleading to me:

Thousands of Western tourists visit the temples of Tibet, the spice markets of Xinjiang and the lush jungles of Yunnan each year. David Eimer did, too, repeatedly, over the past decade, but he had a larger purpose in mind: to investigate the nature of Chinese rule in the restive border regions where its 55 ethnic minorities live.

Those minorities number more than 100 million but as a group are all but invisible to the outside world, their situation complicated by the seeming paradox of being citizens of China without being part of the Chinese people.  .  .  .

Because Mr. Eimer is not bound by diplomatic or journalistic niceties, he can be blunt in the terminology he uses. To him, China is not so much a state or a nation as a “huge, unwieldy and unstable empire,” with the Han in the dominant position that the Austrians, Turks or English once enjoyed in empires now vanished. Uighurs and Tibetans, consequently, are peoples resisting “the colonization of their country,” that last word being one Beijing abhors and considers an expression of “splittism.”

It’s hard to think of a worse comparison for China than the “English” empire.  First a few numbers. Of the 105 million minority population in China, 6.3 million are Tibetan and 10 million are Uyghurs.  That’s slightly over 1% of China’s population.  These are the two groups that one can at least imagine might form independent countries some day (although I doubt it.)  The rest tend to live in eastern China, in provinces where the Han population is larger than the minority population.  Even Yunnan province is 67% Han.  The other groups are not pushing for independence, and it seems inconceivable to me that any majority Han province would ever break away from China.

If you look at a map of China by ethnicity, the Tibetans are a particularly interesting group. Although not at all numerous, they occupy an enormous region spanning several different provinces.  Almost all of Qinghai is Tibetan, as is the entire western half of Sichuan.  Yet they have 1.5% of Sichuan’s population.  If you add in Xinjiang, (where the Uyghurs are concentrated) you are basically talking about the entire western third of China.   (China is roughly the size of the US, including Alaska.)  That’s a big region, and it helps explain why the issue is so sensitive to the Chinese.  Terrorism in Xinjiang is a rapidly growing problem for China.  The province is 43% Uyghur and 41% Han, to give you a sense of how difficult the ethnic situation would be to resolve. Think Northern Ireland, or Israel/Palestine, or some other chronic trouble spot, not British Empire.

A better analogy for China (in terms of demographics, not human rights) would be Canada, where there are lots of indigenous people in the vast, thinly populated north, or the US, or Brazil, or Australia.  But none of those 4 countries has a large indigenous muslim population. The human rights abuses currently taking place in China can (hopefully) be fixed over time.  But I’m not at all sure that would make the Tibetan and Uyghur issues go away.  Xinjiang is nothing like India, where the British could just walk away.

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