Will China fail as Singapore has failed?
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.
Tags:
6. October 2012 at 09:19
Singapore abruptly began liberalizing its investment strategy after the 1985 recession, whilst maintaining its coerced high savings, so I wonder what Barro’s article re-analyzed today would look like.
Or maybe I don’t have to wonder?
6. October 2012 at 09:23
(seriously, though, if anyone knows a similar analysis incl. liberalization and 1997 financial crisis performance, do link it… I don’t trust just eyeballing a graph)
6. October 2012 at 09:44
The Economist links to my debate with MF: Totally worth it. (Now I wish I’d kept arguing.)
6. October 2012 at 09:44
The real news of course is that Free Exchange mentioned Scott Sumner without introduction.
6. October 2012 at 10:06
Could Singapore be a rare case of exceeding the Solow-Swan “Golden Rule” level of saving?
And yes, it is a terrible embarrassment that authoritarian China is so thoroughly outperforming democratic India. Just goes to show that democracy is not that magical – India’s political class is on the whole probably more corrupt than China’s (which is saying something, I know). Clearly China has evolved a sufficient check on power to produce its current progress, and it puts a spanner in the works of many theories that even this can be acheived under a single-party autocracy.
6. October 2012 at 10:38
He linked to the bit where I was lecturing MF on the definition of second-order logic, too; that’s priceless.
6. October 2012 at 10:48
Evidence for misallocations: http://www.nytimes.com/2012/10/05/business/global/glut-of-solar-panels-is-a-new-test-for-china.html
HT Alex Tabarrok
6. October 2012 at 10:48
It was a long time ago, so I forgot which one, but China’s Mao, Chou or Deng was a big fan of Singapore’s Lee, in terms of social engineering
Perhaps it depends on one’s perspective, but Hong Kong and Singapore are different. The former could generate a huge amount of revenues by dumping dirt into the sea. Has anyone got any postcard of the Victoria Harbor say 40 years ago? So, traditionally it could support a huge government bureaucracy. On the other hand, Singapore digs into its pocket to finance its professional class. Again, it was a long time ago, it used to be college grads were rewarded with incentive
And size matters. Social engineering with a 6MM people is a lot easier than 1B plus. So, one could argue China might fair even worse than Singapore. Perhaps this is another way to say about the millionaire efficiency issue mentioned in the article
6. October 2012 at 11:17
David, Good point. I won’t disagree with your graph, but let me point out that PPP comparisons between those two are all over the map. I think HK is really being held back by its insane land use policy.
Saturos, Switzerland is democratic, India’s a country where peasants get to vote in elections along with a billion other people.
Or how about this. India’s the most democratic country on the Indian subcontinent, and the most economically successful. China is less democratic than Taiwan (and even HK) and is much poorer. Within culture comparisons show democracy is usually better. (I’m not claiming causation, but my hunch is that there is some.)
6. October 2012 at 11:39
Singapore also has aggressive land use policies.
On the other hand, Singapore also has aggressive land reclamation – Hong Kong much less so – but the exercise of doing so is phenomenally expensive and is possibly where all that money has been going.
6. October 2012 at 11:46
@Bosco
Singapore bumped its land area by 20% through reclamation; there’s a lot of dumping dirt in the sea going on there too. For comparison, Hong Kong is at ~5% or thereabouts.
6. October 2012 at 12:08
Thanks to Saturos for this link to a Robt Hetzel speech;
http://ceposvideo.provector.dk/?poditemid=18925&tagsid=&soegeord=
Interesting historical tidbit about Washington Irving at about 31 minutes in (Hetzel turns on his microphone finally at about 4 minutes).
Also, liked his ‘perfect storm’ analysis of the Fed having its eyes on high headline inflation at the same time Lehman tanked, providing a distraction from what should have been their goal.
I’ve also, as Hetzel says, thought that the Fed should not be in the regulation and supervision business. As for the role the GSEs played in the recession; it depends on what your definition of ’caused’ is.
6. October 2012 at 20:01
David (and Scott),
maybe you don’t have to wonder. (US and Germany thrown in for perspective).
http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:HKG&dl=en&hl=en&q=hong+kong+gdp#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ne_con_prvt_pc_kd&scale_y=lin&ind_y=false&rdim=region&idim=country:HKG:SGP:DEU:USA&ifdim=region&hl=en_US&dl=en&ind=false
6. October 2012 at 22:29
Scott, so democracy is better at producing high living standards, but because China (at least right now) has better “culture”, it does better anyway? This is what Noah would call “labelling the residual”, or pretending you know what you don’t know. (Understanding takes more work than that.)
Patrick, I found that on Lars Christensen’s blog, he put it up a week ago. And that argument about being distracted by inflation is something Scott has been saying for ages too, though he has also said that the Fed has been too contractionary since 07.
All sorts of problems with Hetzel’s framework – he wants to put bad policy down to “price fixing” and says that interest rates were “too high” causing the crash, i.e. bond prices too low. So you would expect to see the crisis preceded by a period of high rates, right? And yet rates were mostly low. And he can’t explain what the Fed should have done better, it should have lowered interest rates quicker – except it did lower rates quickly. Should have focussed more on money creation – so why didn’t QE work? I was underimpressed by Hetzel relative to what I expected from Scott’s praise, it seems that market monetarism has to be fully accepted before you can explain things clearly.
7. October 2012 at 03:10
Hmm, what happens if one removes imputed rent – Hong Kong’s house prices are silly and get bid up a lot more by migrants from the PRC.
7. October 2012 at 04:28
I share observations that people seem to have higher living standards in other countries than would be indicated by their dollar incomes.
The Europeans have 75 percent of our dollar income? But they also get six weeks off a year (two weeks the norm in the USA (for non-professors) and health care, and don’t spend 7 percent of GDP on VA-Homeland Security-Defense.
Is any American city as nice as many are in Europe?
7. October 2012 at 05:16
” “Quasi-consumption” is a slippery concept. It’s possible it serves to obscure more than it reveals. ”
This is cute. The author begins with these artificial constructs called “Consumption” and “Investment”, but somehow assumes these constructs are real and discrete, then accuses another author of creating a new concept which obscures the difference between the previous two artificial concepts.
7. October 2012 at 06:18
[Note – the previous comment was in reference to the linked article]
Scott, I’m surprised you haven’t pulled out some historical information on the United States to defend the Chinese path:
US PCE data vs. GDP goes back a bit… But even if you go back to the 50s, you see consumption rates lower (60%) instead of today’s >70%. AND this was with all sorts of “overinvestment” like massive numbers of power plants providing extra capacity due to cost plus price regulation, etc. Go back to the 40s, WWII, and you see PCE at 50%.
http://www.economicsjunkie.com/wp-content/uploads/2009/05/us-personal-consumption-as-percentage-of-gdp-1929-2008.png
In fact, the only time you get PCE back over 70% was when you look at – you guessed it – the Great Depression. In fact, it peaked at 83% in 1932.
Of course, some yokel is going to yell “look, consumption drives depressions”, but the reality is that depressions are partly driven by lack of investment due to lack of _anticipated_ demand.
7. October 2012 at 06:29
David, housing prices and rents in Singapore are sky high too.
Benjamin, I fully agree that GDP/capita is just not a good way to look at living standards at all. It’s much better to look at consumption levels but even then there are lots of ifs and buts.
Overall one has to bear in mind that GDP is a flow variable. It says how much was produced/sold over time. It does not say anything about wealth. It counts turnover. Who benefited from this production is already a different question (in many Western countries wages are a large part of GDP but that’s already different for Singapore). And even looking at consumption, one may wonder whether all consumption actually results in some kind of quality of life benefit. Trivial example, in the US I’d hire H&R Block for my tax return because it’s impossible to do without that kind of services. That is consumption of a service and should count for both GDP and household consumption. And H&R Block has now a job created by me. Income that will again be spent. etc. In Singapore I’d fill out a three line form online in 5 minutes and there is my tax return – no consumption of tax advisor services at all. I just reduced consumption _and_ GDP! But do I enjoy life any less because my tax return was simpler and I didn’t have to waste additional money to fill it out? – On the other hand, I know a lot of people here in Singapore who’d probably fall under “millionaire” (owning a house, any house, and there you go, you’re a millionaire). Their lifestyles are roughly equivalent to what I’d imagine a mid level HVAC salesman in small town Texas to have. Remember this is a country where a Corolla sets you back over 100k (USD). A lot of these GDP and millionaire data are just plain money illusion. The real money illusion. Getting fixated on numbers.
To me all these aggregate data are nice to look at and nice to play with but I wouldn’t make any sweeping conclusions. The systems are way too different.
7. October 2012 at 09:34
I just caught Krugman on ABC’s This Week. What a weasel.
He was mainly selling the soft bigotry of low expectations for this recovery, ala Reinhart and Rogoff; It’s a financial recession, whattaya expect, a real recovery?
I wonder if Krugman refuses to appear if there is another economist on the panel.
7. October 2012 at 10:46
House prices in Singapore are indeed pretty darned high, but they are lower than Hong Kong’s.
And who receives the land rent anyway.
7. October 2012 at 10:47
Hasn’t Krugman dissed economist vs economist debates on TV as a medium that makes the public tune economists out altogether?
7. October 2012 at 11:03
In the long run Singapore has and will continue to have the single most important geographic position on earth. No matter what happens the Singapore strait will be the most important seaway for shipping and just having services and transhipment facilities provide revenue to the government. In some ways the Singapore could be compared to petro economies like Norway.
7. October 2012 at 11:52
Saturos, I certainly don’t believe that China has a better “culture.” And why put culture in quotation marks? I regard Smith’s views on culture as being silly. I have a hard time believing he actually believes what he says. He seems really uptight about cultural comparisons–afraid to offend people.
Statsguy, The difference between consumption and investment is a matter of degree. But no good is more “capital-like” than a subway system. They last almost forever. It’s not even debatable where that belongs.
Mbk, I referred to PPP-adjusted data for Singapore. I agree that middle class Texans have very high living standards.
Eorr, Indonesia shares that location. I don’t buy the Norway comparison at all.
7. October 2012 at 17:55
“I expect China to fail more like France, Britain or Japan have failed”
In other words, you expect China to fail with near zero GDP growth? I think most “China bears” agree. Or did you mean that China will “fail” with higher growth than those, because it will be able to survive a banking crisis without serious harm to real growth, because it will use NGDPLT? Or did you mean that China won’t have a banking crisis because the bank-financed investments are going to be able to service their debts after all? It’s hard for me to understand what model you’re using here, so it’s hard for me to understand whether to buy your conclusions.
Note that if China fails like France, Britain, or Japan, it may split up violently in the short term.
Also, as no one else has mentioned it yet: countries can’t run current account surpluses forever. It stops when the creditor country owns everything, or when the debtors choose to stop it. My money is on the latter, politically speaking. At that point, an economy that is built for external growth will experience one heck of a demand shock.
Your posts on NGDPLT are very reasonable: they say we don’t know what happens with stable NGDP growth, so let’s implement NGDPLT before we say that NGDPLT can’t solve all demand shocks and prevent all painful financial crises. That’s a very different thing than you seem to be implying here, which is that demand shocks and financial crises do not need to be considered when predicting a country’s future real growth rate.
7. October 2012 at 19:35
Scott, yes these consumption data I found aren’t PPP but the orders of magnitude are telling. It would take quite a radical PPP adjustment to change the direction of my point. Not to mention, as you have said elsewhere, that PPP data are all over the place and their generation depends on a lot of discretionary choices.
8. October 2012 at 04:39
the Port of Singapore stopped being a reliable source of revenue when Malaysia started seriously investing in its own ports; that was in the 1970s. Today Malaysia has Tanjung Pelepas, which is literally on the bit of Malaysia right next to Singapore.
You can’t monopolize access to the sea unless the relevant value-adding of exports and imports come from your own country, which Singapore can’t realistically ensure.
8. October 2012 at 05:57
And why put culture in quotation marks?
Because I don’t think anyone has a good scientific theory of what “culture” is.
[long and somewhat confused rant omitted]
Here’s a question. Let’s say you know that culture causes high saving. Let’s take somebody else who doesn’t know that.
Now, what can you tell us about the world, that he couldn’t? Apart from the statement itself, that culture causes saving?
The question is why does authoritarian China outperform democratic India? You can’t say one is more economically liberal than the other, that just begs the question. India may have more “political freedom” officially, but I don’t see that government as much more accountable than China’s. Yes China has censorship, forced abortions, religious persecution, etc. but I don’t see the life of an ordinary Indian being much more free (even in the classical liberal sense) than a Chinese. Ineffective, dithering and corrupt government which fails to acheive the aim of defending its citizens against aggression and coercion of all forms is just as bad as a government which, to a limited extent actively perpetrates such coercion, but also crowds out other aggressors, i.e. does what a State is supposed to do. I’m not too confident about the Chinese state’s long run prospects, but at least for now Indians don’t have much reason to be happier with the performance of their governing institutions than the Chinese are with theirs.
8. October 2012 at 08:22
polymath, No I meant it would level off at about 75% of US per capita GDP, like most devleoped countries do. It still has lots of growth ahead, with occasional recessions.
Saturos, I actually agree with almost everything you say. Culture is a sort of X factor, which we don’t understand. But it’s there, and even if it’s a proxy for something unmeasurable (a mysterious chemical in drinking water?) it’s still correlated with income. So I stand by my China/Taiwan/HK, and India/Pakistan/Bangladesh comparison. There’s some mysterious chemical in drinking water (let’s say) that makes East Asia grow faster than South Asia. So comparing countries with the same drinking water, you still get democracy beating less democratic countries. It’s almost like a regional dummy variable in a regression, which even Noah Smith would find unobjectionable.