Those who read this blog know that I love Adam Smith’s comment about there being “a great deal of ruin in a nation.” It seems to me that many people have trouble putting “failure” in perspective, understanding that a major failure in one area of the economy is not unusual, and doesn’t tell us much about the overall performance of the economy–at least in any relative sense.
I’m always surprised, shocked and horrified when commenters suggest I am some sort of fan of the Chinese government or its policies. I strongly oppose their repressive political policies and statist economic policies. It’s a horrible government in an absolute sense, and yet it’s a far better government then they had in 1976. So much better than the recent improvement in living standards is arguably the best thing that has ever happened in world history.
Singapore provides a good illustration of the point I’m trying to make here. Beginning with Robert Barro’s WSJ essay from 1992, many commenters have pointed out that Singapore invests twice as much as Hong Kong, and ends up with roughly the same growth rate and per capita GDP. This is attributed to the fact that Singapore’s government is more interventionist, and their investment decisions are more politicized. This link includes the Barro article, as well as several others in the same vein:
Singapore’s gross investment was 13% of GDP in the early 1960s, reached 21% between 1965 and 1969, and then soared to an average of nearly 40% since 1970. This staggering amount of investment has been financed partly by the highest saving rate in the world (thanks to governmental coercion, rather than an especially thrifty disposition of the populace) and partly by massive borrowing from abroad (until the mid-1980s). Another way to put this is that Singapore’s prosperity in terms of production has not been translated nearly as much as Hong Kong’s into high levels of consumption. In 1989-90, when Singapore’s per-capita GDP was 104% of Hong Kong’s, its per-capita private consumption was only 71% of Hong Kong’s.
Prof. Alwyn Young of MIT’s Sloan School discussed many of these facts in a recent study (“A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore,” forthcoming in the National Bureau of Economic Research’s 1992 Macroeconomic Annual). His stress was on the effects of the different governmental polices on productivity and growth. The main findings follow from the facts already presented: Although Singapore has plowed twice as much of its GDP into investment, the growth rates of GDP have been about the same.
Obviously China is following the same path of promoting high levels of investment, often directed by the government in ways that are less efficient then what you’d get with private sector investment. So that raises the question of whether I think China will fail as Singapore has failed. The answer is no. Singapore has a per capita GDP roughly equal to the US (in PPP terms) and by far the most millionaires (per capita) in the world. Before too long it will become normal for middle-aged Singaporeans to become millionaires. I expect China to fail more like France, Britain or Japan have failed, countries with roughly 75% of the US per capita GDP. That’s because although China’s governance will likely improve over time, it’s unlikely to match Singapore’s efficiency.
I guess my commenters want me to be outraged by an economic model that two generations ago was as poor as North Korea, and in a couple more generations will be as rich as Western Europe. Sorry, but it’s too much effort for me to work up much indignation, despite all the very real inefficiencies in China. Barro does a good job of putting things into perspective:
I should recall that this discussion concerns two of the great success stories among the world’s economies. Hong Kong and Singapore are co-champions in growth rates of per-capita GDP since 1960, and these performances reflect many favorable elements, such as friendly economic climates and political stability. Singapore’s shortcomings have to be interpreted relative to Hong Kong’s strengths, not relative to the many economic disaster areas of the developing world.
Back in 1976 China was poorer than India, Pakistan and sub-Saharan Africa. If people want to be outraged by bad economic policies then those are the first places they should look.
PS. Free Exchange replied to my post arguing that investment is investment.