This may be my last post for a while, as I leave for China tomorrow and I’m not sure how effective my internet access will be. Even if it is effective, I will obviously slow down for a while. I want to enjoy my trip to what is one of my favorite countries. When I return I will resume blogging, even if the recession is “over” by then, whatever “over” means. (BTW, in my view the end of the recession should be dated at the peak of the unemployment rate.) So today I’ll start with a few random observations about China, and then a brief discussion of some research that I recently conducted.
India is sometimes referred to as a “subcontinent.” But who cares how big India is, isn’t Greenland almost as large? (Well on my map it is!) India matters because it has lots of people, indeed in 25 years it will have the world’s largest population, and it’s not inconceivable that someday it may have the world’s largest economy. But I’m supposed to be talking about China, not India. I think it is useful to think of China as a sort of “sub-world.” Its population is roughly equivalent to the entire Western world; that is Europe, the Americas, Australia and New Zealand. Talking about the Chinese economy is about as meaningful as talking about the “Western economy,” and thinking it fits both Switzerland and Bolivia. But despite its size China doesn’t loom that large in our imagination, and it is interesting to consider why.
Part of the problem is illustrated by the famous old New Yorker cover, showing how Manhattanites perceived the rest of the world. We think what is close to home is more important, indeed even larger in some sense. Last summer I spent 10 days driving around Crete, staying in 4 different hotels in different parts of the island. After a while it started to seem like Crete was really big, really diverse, and really important. It had mountains, quiet old villages, beach resorts, monasteries, car-filled cities, gorges, ancient ruins, etc. The US started to seem far away. Even when I saw foreigners they were mostly Northern Europeans. And yet I saw just the western portion of what is a modest island of only 600,000 people.
Then you have the media. They probably spend more time talking about Iraq, or Iran, or Israel, than they do China. Do false impressions matter? Tyler Cowen suggests they might:
I believe this point has not received sufficient attention:
“In a twist that leaves some experts shaking their heads, the fund needs money from cash-rich developing countries, like China and India, to help more developed but strapped countries, like those in Eastern Europe.”
One possibility is that the recent IMF loan program is about making governments better off, not about making people better off. Can you imagine that?
I’m no expert in development, but my hunch is that development experts spend more time thinking about Vietnam than Henan province in China, even though both areas have roughly 90 million people. Countries, not people, are viewed as “units.” Another example is that people often focus on the fact that most developing countries fell even further behind the rich world between 1970 and 2000, and not on the fact the most people in developing countries saw their real incomes rise faster than those in rich countries. What explains the difference? India and China, home to half the population of the developing world.
In my previous trips to China the moment I get off the plane I started to feel like China is the center of the world, much faster than I did in Crete. I immediately start to realize that much of what I have read about China in the West is, well, not necessarily false, but somehow beside the point. I suppose if we went back in time to Pittsburgh in 1950, the air would seem quite polluted. But I doubt many Pittsburghers were particularly obsessed with that fact, they probably viewed it as normal. After a day or so I stop paying attention to the pollution in Beijing. Indeed there actually are a lot of “blue sky” days in Beijing, just as the government claims, it’s just that the air is not as blue as in a typical American city. But there are also some really gray days. On my first trip in 1994 Beijing smelled like burning coal. Today the air actually seems a bit cleaner (I don’t know if it is) despite the huge increase in the number of cars. If I am able to post from Beijing I will give you my impression of the changes since I was last there in 2006. As a rule of thumb, Beijing changes as much in three years as Boston does in 30.
[By the way, in Chinese the name of China is "Zhong guo" which means "central country." This name (more colorfully translated as "Middle Kingdom") is the Chinese version of that old New Yorker cover.]
If China is its own world, then it would have to be not just big, but also diverse. In geographical terms it is much more diverse than the US, with much bigger mountains, drier deserts, and wetter rainforests, etc. There is so much to see that in the new 1200 page Lonely Planet guide there is no mention of the Siguniang mountains. Maybe 100 miles from a major Chinese city (Chengdu), like the Tetons but much higher, and no mention at all. Take a look at these pictures and imagine they are 100 miles from Chicago. It also has dozens of different spoken languages, although only a single written language. In a later post I’ll present my pet theory that their unified written language caused China to fall behind the West over the past 1000 years.
There is also a lot of ethnic diversity, with more than 100 million members of minority groups. But the Han group is still 92% of the population. Even within the Han, however, there are huge differences. The rural people who work as migrant workers in the cities are roughly equivalent to immigrant groups who do the more physically demanding jobs in rich countries. Because they belong to the same ethnic group, and because China doesn’t have a caste system like India, my sense is that economic success in China produces social integration at a faster rate than in South Asia or Latin America, where the economic disparities are often associated with racial, ethnic or caste differences. China even has billionaires who grew up in poor peasant farmer households. (BTW, the term ‘poor’ is redundant; before 1978 there were no non-poor farmers in China.)
Although I read a lot about the Chinese economy, I don’t know enough about the recent stimulus package to have an intelligent opinion. Ever since the 1980s I have been more in the “optimist” camp, expecting China to grow rapidly and surmount the problems it faces. But that doesn’t mean that those who worry about specific problems are wrong. China does face great environmental challenges. And there are all sorts of other problems like corruption and politically-motivated lending from state-owned banks. It’s just that I’ve felt that the positives were powerful enough to allow the Chinese to surmount these difficulties in the long run. As far as the short run outlook for the economy, I have no idea. You’d think they’d have some occasional financial crises along the way, what with all the bad lending, but even in a bad year like 2009 they are expected to grow 9%, and perhaps 12% next year.
Another thing that happens when you get to China is that you tend to stop thinking about “China” as the Chinese government, and start thinking about it as a country. I suppose this is because as a tourist I don’t really notice the government. So when you see dramatic changes at every level of society, not just economic, but also social, cultural, architectural, etc, the fact that the government hasn’t changed much at the center somehow seems less important than from an overseas perspective. Indeed I notice that when intellectuals talk about foreign countries they often use the name of the country to denote the country’s government, without even saying so. I think that can subtly distort one’s judgment.
The western press often presents China as a set of binaries; government sector/private sector, urban/rural, rich/poor, Han/minorities, coastal/inland, etc. Believe me, it’s way more complicated, even if the categories contain a grain of truth. The rural areas and inland areas have grown very fast since 1978, just not as fast as the cities and coastal areas. Much of the economy is in a gray area between private and public, where it is hard to draw a sharp line, and in any case the line keeps shifting. To give you a sense of how complicated China is, I’d like to discuss two coastal provinces that should be extremely similar, but are not. First a bit of perspective. The three biggest boom areas of China are the Pearl River delta near Hong Kong, the Beijing—Tianjin corridor in the north, and most importantly the Yangtze River delta near Shanghai. Shanghai is the New York of China.
My favorite Chinese economist is Yasheng Huang at MIT, who did a fascinating study of the provinces that border Shanghai; Jiangsu to the north, and Zhejiang to the south. He observed that both had similar histories of being relatively prosperous and open to trade. When the economic reforms started in 1978 Jiangsu had the 3rd highest per capita GDP (excluding urban provinces like Shanghai), and Zhejiang was 7th. In the 1980s, however, the provincial leaders in Zhejiang province were much more encouraging of private business. Although we think of the economic reforms starting in 1978, a huge ocean liner turns very slowly. The government of China does not just wave a magic wand and order changes, rather change often bubbles up from the bottom. So the leaders of Zhejiang province, and even more so the early entrepreneurial pioneers in business, were risking their lives. Just imagine if China had decided to abandon the economic reforms and go back to the Cultural Revolution.
BTW, a brief digression that libertarian readers might find inspiring. The rural reforms began in late 1978 in a single village in Anhui province. Each family in the commune was assigned their own plot of land. This decision was incredibly risky, so everyone took a blood oath to secrecy. Gradually other villages started to copy them. When the government saw that the reforms were successful, they eventually gave them their blessing. But it was not the sort of top-down change that is often portrayed in the West. It was the Chinese people that took the lead, and the leaders followed. In an earlier post I called this agricultural reform the single best thing that has ever happened in world history.
Yasheng Huang points out that the 1980s have been widely misunderstood. The industrial revolution occurred mainly in the countryside, where free enterprise was encouraged. (He points out that the name “township collective” was misleading, and fooled Westerners into thinking they were public, not private enterprises.) These reforms actually led to a reduction in income inequality in the 1980s, not the increase many Westerners assume occurred. Why? Because the growth was fastest in rural areas that had been much poorer than the cities. Of course since 1990 the cities have grown faster, and income inequality has indeed worsened. Huang argues that that is because government policy favored the cities after 1990.
Back to Zhejiang. After the party leaders adopted a business-friendly policy, economic development in Zhejiang province took off. Since 1978 Zhejiang has gone from 7th to 1st in per capita provincial GDP, while Jiangsu, which has also grown fast, stayed at 3rd. But the most interesting part of Huang’s argument concerned foreign investment. Which province do you think attracted the most foreign investment? Surprisingly it was Jiangsu, the slower growing province. The reason was that after the economic reforms began the central government provided secure property rights for foreign investors in all of China’s provinces. In contrast, property rights for local business was much more iffy. So much so that many of the most famous “Chinese” corporations are actually incorporated in Hong Kong, which although part of China has a very different legal system.
Then Professor Huang applied a Ricardian comparative advantage model in a very ingenious way. He noted that if Zhejiang province was very private business-friendly, and both provinces were equally welcoming to foreign investors, then Jiangsu province would have a comparative advantage in attracting foreign business. But since Zhejiang province welcomed all types of business, it had a more efficient economic policy regime and would be expected to grow faster. And that is exactly what happened. Jiangsu attracted much more foreign investment, but Zhejiang grew faster.
I recently did some research with a Chinese PhD student named Tanyue Sun. She built a panel data set for 6 cities in the two provinces, and we found that the difference between Jiangsu and Zhejiang was even more dramatic if you looked at personal income, rather than GDP per capita. In relatively market-oriented cities in Zhejiang province, such as Wenzhou, the firms are mostly owned by locals, and GDP per person is only slightly higher than the personal income per person. In contrast, in a Jiangsu city like Suzhou, much of the industry is foreign-owned and GDP per person is roughly 3 times higher than personal income per person. The people in Suzhou produce a lot of output, but much of the income flows out of the country to the owners of the foreign enterprises. So even in two seemingly similar coastal provinces, there are vast differences in the economic structure. However in recent years these differences have narrowed, as Jiangsu province has also become more welcoming to domestic entrepreneurs.
Professor Huang argues that many of the Chinese problems that are blamed on free market reforms are actually caused by a lack of free markets. The urban-led growth after 1990 was much more focused on state-owned enterprises. It is true that the share of China’s economy in the private sector did gradually grow, but only because they were far more productive that the state-owned enterprises. The government-owned banks continued to favor state-owned projects in the big cities, and the smaller private businesses had to grow through retained earnings. I recall that one of his papers pointed to a surprising lack of entrepreneurship in Shanghai.
When economic reforms were more market-oriented in the 1980s, inequality became less of a problem, when they became more state-directed after 1990, inequality increased. In recent years the government has tried to help the rural areas, and I believe that some progress has been made, but the structure of the Chinese economy still favors urban residents. While this leads to a lot of grand and very impressive projects in the big cities, it may be less effective than a more market-oriented reform agenda aimed at the countryside. Still, on the plus side China is getting a lot of needed infrastructure built at relatively low cost, such as vast new subways systems. New Yorkers have been trying to scrounge up money for a new east side line for 60 years, in Beijing and Shanghai they open a new subway line roughly once a year.
In my view the social indicators in China would look better, not worse, if market reforms had occurred at a faster pace. And once again I think Zhejiang province is the best example. Not only did their incomes grow much faster than in neighboring Jiangsu, despite all the foreign investment flowing into Jiangsu, but their Human Development Index score is now highest among all non-urban Chinese provinces. If market reforms were really the cause of China’s social problems, you wouldn’t expect the social indicators in Zhejiang to be so good.
I would strongly recommend that anyone interested in China read Yasheng Huang’s Capitalism with Chinese Characteristics. I haven’t had time to read the book, but I have read many of the papers that he draws from. Like any academic with a strong counterintuitive perspective, he may occasionally push his thesis a bit too far. (Hmmm . . . who else could I be thinking of here?) But even if you don’t buy all his arguments, you will never think about China in quite the same way.
And by the way, when I refer to anyone interested in China, I of course mean anyone with even a passing interest in what’s going on in the world today. Lester Thoreau recently announced that it would take China at least 100 years to catch up to the US in total GDP. But he was also the one in the 1980s who predicted the Japanese would surpass us. Normally I like contrarians, but not this time. China will almost certainly surpass the US in GDP within 10 years, even using World Bank PPP estimates, which I think understate the true size of the Chinese economy. The cost of living in the interior is still absurdly low. If the true ratio of price levels is 3 to 1, then China will be number one by next year.
I often think about the little village in poor Anhui that started it all. Wouldn’t the secret pact of Mr. Hongchang and the other 12 families of Xiaogang village make an inspiring Hollywood story? Don’t hold your breath, there’s still more films to be made glorifying Che Guevara. Of course Che would have preferred China’s pre-reform agricultural policy. The one that led to mass famine. The one that the brave peasants of Anhui rebelled against.