Will China own 1/2 of the planet?

I was reading a study by Garett Jones in the Asian Development Review and came across this interesting tidbit:

Modern optimizing macroeconomics begins with the Ramsey growth model, where time preference plays a large role. If national average IQ differs across countries, and if the IQ–time preference relationship discussed by Shamosh and Gray (2008) holds across countries, then the Ramsey model makes a strong prediction. That is, in a closed-economy world, high-IQ countries will save more and have larger ratios of capital to output. Jones and Podemska (2010) provide evidence that this theoretical prediction holds true in practice. They found that the correlation between national IQ and a nation’s capital–output ratio is 0.64.

Further, in an open-economy world, the Ramsey model predicts that high-IQ countries will ultimately own all of the world’s capital (Barro and Sala-i-Martin 2003). In the modern world, presumably somewhere between those two extremes, we might expect high-IQ countries to hold, at the least, a disproportionate share of the world’s globally traded low-risk assets. And that is indeed the case. Since the mid-1990s, when reliable data first became available, a nation’s average IQ has been positively correlated with the ratio of US Treasuries to that nation’s nominal GDP (Jones and Podemska 2010). In 2007, the correlation between national IQ and that nation’s Treasury–GDP ratio was 0.39, and the relationship remained statistically significant when controlling for log GDP per capita.

As long as East Asian countries (and Singapore) continue to have the world’s highest average IQs—not a foregone conclusion, to be sure—conventional growth theory predicts that these countries will hold a disproportionate share of the world’s globally traded low-risk debt. The predictions of theory hold in the data—indeed, the empirical relationships are actually stronger than conventional theory predicts, as demonstrated in Jones and Podemska (2010).

Then Matt Yglesias directed me to a fascinating Tim Fernholz post with this graph:

So let me get this straight.  The ethnic Chinese are already buying up half of all the best real estate in London.  And of that share, 45% comes from a tiny number of Chinese in Hong Kong, Singapore and Malaysia, and the other 5% from the 1.4 billion mainland Chinese who are ultra-thrifty but haven’t yet gotten rich like the 20 million Chinese in those three small economies.   Care to estimate the share of planet Earth that will be owned by the Chinese in 2075, once the mainland becomes rich?

PS.  After doing the post I came across this:

President Obama has become the first president in 22 years to issue a formal order blocking a foreign investment into the United States on national security grounds. The decision, which denies the acquisition of a small Oregon wind farm project by a Chinese-owned company, will unfortunately be seen as yet another signal – this time from the highest possible level — that the United States does not really want Chinese investment. And for an economy still struggling to create jobs, that’s the wrong signal to send.

Yeah!  That’ll stop the Chinese!


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20 Responses to “Will China own 1/2 of the planet?”

  1. Gravatar of udonotgetit udonotgetit
    29. September 2012 at 07:42

    A world war is much more likely

  2. Gravatar of Saturos Saturos
    29. September 2012 at 07:45

    Be honest, Scott, did your wife tell you to do this post?

  3. Gravatar of Saturos Saturos
    29. September 2012 at 07:49

    I read about the executive order too. Pure political capture. It’s just election antics.

    The latest from Richard Fisher: http://www.newsdaily.com/stories/bre88r16v-us-usa-fed-fisher/

    And in other news, they just found water on Mars.
    (Well, evidence that it used to be there, but still.)

  4. Gravatar of ssumner ssumner
    29. September 2012 at 07:50

    Saturos, My wife says 1/2 is too low, more like 2/3rds.

  5. Gravatar of Becky Hargrove Becky Hargrove
    29. September 2012 at 08:18

    Yet another example of linear thinking run amok!

  6. Gravatar of johnleemk johnleemk
    29. September 2012 at 08:28

    Minor nitpick: Malaysia and Singapore have substantial non-Chinese populations (the ethnic Chinese are a minority in Malaysia, actually). Although Chinese Malaysians hold disproportionate economic power, I’m confident a not insubstantial part of the Malaysian share originates from non-Chinese Malaysians.

  7. Gravatar of ssumner ssumner
    29. September 2012 at 08:34

    Johnleemk, You’ll notice the three add up to 46%, I assumed 1% came from non-Chinese ethnic groups such as Malays. Talk to anyone who knows Malaysia and they’ll find my estimate plausible.

  8. Gravatar of johnleemk johnleemk
    29. September 2012 at 09:36

    That’s quite funny then, since I am Malaysian and have lived there most of my life, and I don’t seem to find your estimate plausible! Of the 40 wealthiest Malaysians, 13 are non-Chinese: http://www.forbes.com/lists/2012/84/malaysia-billionaires-12_land.html

    It’s a minor quibble, of course (we’re essentially arguing about whether you should have knocked off 1 percentage point or 3 to 4 points), but Malaysians are quite sensitive when it comes to issues of ethnicity and wealth, considering our history.

  9. Gravatar of Major_Freedom Major_Freedom
    29. September 2012 at 13:02

    High savings rate.

  10. Gravatar of DrJim DrJim
    29. September 2012 at 13:32

    “… the wind farms are located near a Navy base where the U.S. flies unmanned drones and electronic-warfare planes on training missions.

    “The President’s action demonstrates the administration’s commitment to protecting national security while maintaining the United States’ longstanding policy on open investment,” said a Treasury Department statement.

    The department added: “The president’s decision is specific to this transaction and is not a precedent with regard to any other foreign direct investment from China or any other country.”

    In the absence of convincing evidence to the contrary, I would take these statements at face value, i.e. true. You may not think it is a good reason, but that doesn’t mean the President is lying. You think about economics a lot more than these people do. They think about national security a lot more than you do. The President’s job is to think about both.

  11. Gravatar of Scott Sumner Scott Sumner
    29. September 2012 at 20:27

    Johnleemk, I still think I’m right. I’ll bet there are enough ethnic Chinese from the other countries (including Britain) to offset the number from those three falling a bit further below 46%.

    I’d be shocked if the non-Chinese Malaysian billionaires invested even half as much in London as the Indian billionaires. And they only total 5%. But you know more about Malaysia than me, so perhaps I’m wrong.

    Dr. Jim, I presume that’s not aimed at me, as I never even hinted that Obama had lied.

    On the other hand whenever a politician opens his mouth I assume he is lying, unless I have good reason to believe otherwise. Which is not the case here.

  12. Gravatar of Peter N Peter N
    30. September 2012 at 03:41

    I’m a skeptic on this, after all, the Chinese can’t take over the world, because according to 1985 projections, the Japanese already own %110 percent of it.

    After all the land Imperial palace grounds were worth more than all the real estate in California and the Tokyo stock exchange held 60% of the world’s market capitalization(in 1989)

    “Offshore bids price Canadians out of housing market”
    http://www.cbc.ca/news/canada/story/2012/03/14/real-estate-overseas-investors.html

    The Vancouver purchase cost to rental cost ratio is now over 6.

    And given your conversion factor Chinese labor costs don’t seem to be very competitive with Mexico, which has much lower transportation costs and is in the same time zones as the US.

    5 positions: $1270 to $3175/month
    $7.33 to $18.32 /hr
    5 positions: $952 to $2381/month
    $5.49 to 13.73/hr
    20 positions: $476 to $1587/month
    $2.75 to $9.16/hr
    10 positions: $396 to $1269/month
    $2.28 to $7.32/hr

    The Chinese are hitting some walls. They have a bubble. Their labor costs are becoming uncompetitive. High oil prices are pushing up their transportation costs.

    They’re piling up negative externalities and counting on technology to bail them out. It’s desperate. It’s clever. They may not have had any better choices. But that doesn’t mean it will work.

    Many of those rich Chinese buying foreign real estate are hedging their bets. If things get bad in China, they’ll have someplace to go.

    This may work out well for other countries in the long run. The French expulsion of the Hugenots was one of the best things that ever happened to England – all that money and talent.

  13. Gravatar of John John
    30. September 2012 at 07:25

    What a load of crap. Read Richard Feynman’s take on IQ. He was given an IQ around 125 and he was one of the best physicists of the 20th century. Innate intelligence is the same for people in every country, one of the basic premises of good economics is that people are the same everywhere and respond to incentives. The Chinese save more because of the incentives they face, such as not having social security. I’d also bet that Chinese average IQ was much lower relative to other countries 50 years ago.

  14. Gravatar of ssumner ssumner
    30. September 2012 at 07:38

    Peter, The Chinese aren’t even close to becoming “uncompetitive” whatever that means.

    John, Who claimed “innate intelligence” wasn’t the same for every country? The quotation discussed IQ, not innate intelligence.

    And why do the Chinese save more in America? Don’t we have Social Security?

  15. Gravatar of Saturos Saturos
    30. September 2012 at 08:50

    Holy crap I have more IQ than Feynman!

    I still feel inadequate, though.

  16. Gravatar of Peter N Peter N
    30. September 2012 at 09:22

    Scott,
    I think by uncompetitive I mean what this guy means:

    “Libertarians don’t even know when to gloat
    http://www.themoneyillusion.com/?p=15455

    If the Spanish and Greek governments shrank enough to balance their budgets, they’d still have 24% unemployment, if not more. Their economies are hopelessly uncompetitive at the current exchange rate.

    Four wrongs don’t make a right
    http://www.themoneyillusion.com/?p=15107

    It also seems clear to me that the euro can’t be fixed with fiscal and banking unions. If Greece doesn’t devalue, it will remain deeply uncompetitive for many years. And yet most Very Serious People (and even Krugman is in that group) would be sad to see the euro collapse and are reluctant to pull the plug.

    We need (low) inflation to prvent (high) inflation
    http://www.themoneyillusion.com/?p=9905

    Because Argentina was fixed to the dollar, their peso appreciated even more. Now they were hopelessly uncompetitive, and tried to restore competitiveness under the only method allowed by a currency board, lower wages and prices, aka internal devaluation.”

    Chinese labor costs have increased. Their transport costs have increased. They have tougher competition. Indonesia and Vietnam are cheaper. Mexico and Brazil are closer.

    Also I’m a bit surprised you’re so taken with a country which engages in all sorts of practices you oppose in this country.

    They have industrial policy.
    The army is in business.
    Banks take lending instructions from the government.

    Loss making state owned companies are subsidized and get loans they never have to repay.

    Bribery and nepotism are rampant.

    Their economic statistics are works of fiction

    They have an out of control local government spending problem.

    In the one attempt at estimation, environmental externalities were valued at -3% GDP after which the government put a halt to any further such estimates.

    Their industrial accounting is impenetrable, and a lot of it has a smoke and mirrors feel to it.

    Huge rushed government infrastructure projects (especially without transparent open bidding) tend to encourage fraud and substandard work. We’ve now seen this in the railroads. It will show up elsewhere.

    Will this lead to catastrophe? I don’t know, but there will certainly be a slowdown. It has already started. Look at steel production and iron ore prices.

  17. Gravatar of Saturos Saturos
    30. September 2012 at 09:39

    Ahh, knew there had to be something wrong: http://blogs.discovermagazine.com/gnxp/2011/12/richard-feynmans-intelligence/

  18. Gravatar of ssumner ssumner
    30. September 2012 at 18:01

    Peter, No, China is not uncompetitive at the current exchange rate. Not even close.

    You said;

    “Also I’m a bit surprised you’re so taken with a country which engages in all sorts of practices you oppose in this country.”

    I’m not at all “taken” with China. As I’ve pointed out many times, China only looks good when compared to the Maoist period. In absolute terms the government is lousy.

  19. Gravatar of TheMoneyIllusion » David Hume’s nightmare TheMoneyIllusion » David Hume’s nightmare
    8. October 2012 at 08:41

    [...] Ha!  Soon after we stupidly invent container ships the Chinese buy up half of central London. [...]

  20. Gravatar of TheMoneyIllusion » Miles Kimball on Noah Smith and Garett Jones TheMoneyIllusion » Miles Kimball on Noah Smith and Garett Jones
    2. November 2012 at 06:14

    [...] Thanks to Scott Sumner for highlighting this interesting and accessible piece by Garett Jones here.  .  . [...]

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