Australia and China keep chugging along

The Economist has a very good essay on the Australia miracle.  It’s not just that Australia’s avoided a recession since 1991, they’ve also done better than other developed countries on a wide range of indicators, such as GDP growth, median wages and public finances (i.e. a small national debt.)  Italy would do well to study Australia.

When I started blogging, some claimed that Australia’s success was due to luck.  They had a mining boom when China began growing rapidly.  But mining has gone into a slump since 2013, with mining investment plunging from 9% of GDP to only 3%.  That’s much worse than the 2006-09 US housing slump:

Yet the collapse in commodity prices was not the end for Townsville or Australia. In fact, it was a fillip for other industries, whose growth helped to make up for mining’s troubles. The plunge in investment allowed the central bank to lower interest rates, lifting the housing business. The sinking currency, which lost 40% of its value against the greenback between 2011 and 2015, caused the number of foreign tourists and students to surge. It also encouraged foreigners to snap up flats in Sydney and Melbourne, giving construction even more impetus.

Building work had reached a nadir in the first quarter of 2012, when construction firms completed projects worth A$20bn. In the last quarter of 2017, that reached A$29bn.

Screen Shot 2018-11-24 at 2.13.17 PMAnd yet Aussie RGDP keeps chugging along at a 3% growth rate.  How have they done it?  The RBA keeps NGDP increasing:

Screen Shot 2018-11-24 at 1.34.32 PMSo the secret of Australia’s success was not the mining boom, it was sound monetary policy.  BTW, Australia has a much higher rate of immigration than the US.  Keep that in mind when you consider the amazing rise in Australian median wages:

Screen Shot 2018-11-24 at 2.40.19 PM

China’s another country that almost everyone got wrong. The NYT has a long article entitled The Land That Failed to Fail.  Here’s the subtitle:

The West was sure the Chinese approach would
not work. It just had to wait. It’s still waiting.

There are lots of experts who know much more about China than I do, and indeed my commenters often suggest that I read those experts every time I do a post on China.  Unfortunately, most of those experts have been wrong, repeatedly predicting the China bubble would soon burst.

Two experts that got it right were Ning Wang and Ronald Coase, who wrote an excellent book explaining the reforms that led to the China boom.

Many experts now insist that China is not a market economy, but I’d put more weight on those who got it right.  Wang and Coase argued that China is much more market-oriented than it appears to outsiders, and so far they’ve been right about the effectiveness of China’s reforms.

That’s not to say China won’t have a recession at some point, most likely they will.  But as we saw in South Korea after 1998, even a severe recession doesn’t prevent an East Asian country from getting rich.

PS.  I wonder if younger readers will find this as hilarious as I do:

In October Mike Pompeo, the American secretary of state, accused Chinese state-owned firms of “predatory economic activity” in the region. Mr Pompeo’s predecessor, Rex Tillerson, had urged Latin Americans to reject “new imperial powers” like China, bent on extracting natural resources while issuing unpayable loans.

By all means, Latin America should avoid imperial powers.



24 Responses to “Australia and China keep chugging along”

  1. Gravatar of Lorenzo of Oz Lorenzo of Oz
    24. November 2018 at 14:22

    Of course, we Aussies have strict border control (island continent makes it easier) and a targeted migration policy so that the newcomers have higher average levels of education than the residents. Only non-microstate in OECD where that is true.

  2. Gravatar of E. Harding E. Harding
    24. November 2018 at 15:23

    By all means, Latin America should avoid imperial powers.

    I agree.

    China is basically a capitalist country with an underdeveloped financial sector.

    The RBA keeps NGDP increasing:

    Eh, Sumner, that graph sorta demonstrates the opposite of your point.

    BTW, Australia has a much higher rate of immigration than the US.

    Yes, but the immigrants are better selected.

  3. Gravatar of Matthias Goergens Matthias Goergens
    24. November 2018 at 17:09

    The good Australian performance is even more impressive when you’ve lived there for a while. They have some rather weird supply side policies like tax incentives to reward you for keeping property unoccupied (‘negative gearing’) or all kinds of silly nanny state restrictions in New South Wales that cost businesses a lot of hassle to comply with. Eg it’s basically not legally possible to run a supper club.

    (And I had that nanny state impression when compared to Singapore..)

  4. Gravatar of P Burgos P Burgos
    24. November 2018 at 19:24

    From the China article:

    Now Mr. Xi is steering the party toward repression again, tightening its grip on society, concentrating power in his own hands and setting himself up to rule for life by abolishing the presidential term limit. Will the party loosen up again, as it did a few years after Tiananmen, or is this a more permanent shift? If it is, what will it mean for the Chinese economic miracle?

    The fear is that Mr. Xi is attempting to rewrite the recipe behind China’s rise, replacing selective repression with something more severe.

  5. Gravatar of P Burgos P Burgos
    24. November 2018 at 19:26

    More from the China article:

    Prosperity has brought rising expectations in China; the public wants more than just economic growth. It wants cleaner air, safer food and medicine, better health care and schools, less corruption and greater equality. The party is struggling to deliver, and tweaks to the report cards it uses to measure the performance of officials hardly seem enough.

    “The basic problem is, who is growth for?” said Mr. Xu, the retired official who wrote the Moganshan report. “We haven’t solved this problem.”

    Growth has begun to slow, which may be better for the economy in the long term but could shake public confidence. The party is investing ever more in censorship to control discussion of the challenges the nation faces: widening inequality, dangerous debt levels, an aging population.

  6. Gravatar of P Burgos P Burgos
    24. November 2018 at 19:27

    Even more from the article:

    Mr. Xi himself has acknowledged that the party must adapt, declaring that the nation is entering a “new era” requiring new methods. But his prescription has largely been a throwback to repression, including vast internment camps targeting Muslim ethnic minorities. “Opening up” has been replaced by an outward push, with huge loans that critics describe as predatory and other efforts to gain influence — or interfere — in the politics of other countries. At home, experimentation is out while political orthodoxy and discipline are in.

    In effect, Mr. Xi seems to believe that China has been so successful that the party can return to a more conventional authoritarian posture — and that to survive and surpass the United States it must.

  7. Gravatar of P Burgos P Burgos
    24. November 2018 at 19:44

    That all might be way too much text, but it explains why people right now might be a little bit pessimistic about China. Xi Jinping is basically a Chinese, intelligent version of Donald Trump with control over a powerful authoritarian state. He wants to consolidate as much power in himself as possible. He isn’t going around talking about fake news or telling blatant, outrageous lies, but he controls the media and he is transforming it so that it reports only what that party wants, not what Chinese citizens would want to know. He is taking a country whose economic development has depended on learning from foreign expertise and instead is insisting on political orthodoxy, which in an autocratic state with a strong leader is just a more sophisticated version of sycophantcy. His whole foreign policy is about creating a world in which other countries essentially have to pay tribute to China. I don’t see why these are very bad ideas in the US and will greatly harm the country, but won’t have a similar impact in China.

    It is also a state with 100 million Christians, and there are predictions that there will be 300 million Christians in China by 2050 or so. My fear is that the large and rapidly growing numbers of Christians is the reason for the Uighur internment camps. That kind of repression is unlikely to work on such a large population of Christians, and if those Christians aren’t allowed to worship freely, I suspect that they will mount a significant challenge to the legitimacy of the CCP.

  8. Gravatar of ssumner ssumner
    24. November 2018 at 21:25

    Matthias, Try living in the US sometime if you want to be overwhelmed with “nanny-state regulations”.

    Burgos, There are certainly problems with Xi’s authoritarian moves, but this is misleading:

    “but it explains why people right now might be a little bit pessimistic about China.”

    The China experts have been pessimistic for decades. They’ve been mostly wrong while I’ve been correct.

  9. Gravatar of Benjamin Cole Benjamin Cole
    25. November 2018 at 03:09

    “Most of the small to medium sized companies (in China) which have flourished in export markets are however not ‘private’ in a Western sense but have close links with local government. Moreover, almost all the large and successful Chinese companies are state owned and the few major genuinely private companies (like Huawei, Lenovo and Ali Baba) have close links with government. State enterprises, albeit highly efficient and competitive, dominate banking, energy and telecoms.

    Plans to dilute that dominance have stopped or gone into reverse under President Ji. The Communist Party has to be consulted on major business decisions. And while a key theme of Deng’s reforms was decentralization away from central government, the process has stopped or gone into reverse. Pervasive corruption at local level is being reined in at the cost of greater central party control. And central control over access to the Internet limits the extent to which the, now, vast Chinese, educated, middle class can participate in an open exchange of information and ideas.”


    If by “capitalistic” one means capital is deployed to industry, then China is capitalistic. It strikes me as a dirigiste economy, ruled by the Communist Party of China. However, China has an excellent central bank.

  10. Gravatar of P Burgos P Burgos
    25. November 2018 at 08:23

    So Summer’s prediction is that China will reach its goal of becoming the premier frontier economy and the overwhelmingly dominant superpower in the world without further liberalization?

  11. Gravatar of ssumner ssumner
    25. November 2018 at 11:59

    Burgos, No. They need further liberalization to avoid being stuck in mediocrity. My point a decade ago was that they’d done enough to get to a much higher per capita GDP, and I was right. Remember that in 1980 China was poorer than India and much of Africa.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. November 2018 at 14:51

    I should add that my point about the selective nature of Australian migration is directed to the high minimum/growing median wage point. If you make sure your immigrants (on balance) keep or slightly improve the labour/capital ratio, it makes it easier to maintain scarcity premiums on labour.

    If, on the other hand, they add more to the labour side than the capital side, then downward pressure on labour incomes is inevitable. (The claim that poor migrants will increase the demand for the labour of existing residents strikes me as very implausible, even if wage stickiness effects mean that their effects will largely register as flattened wage growth.)

    It is obvious that migration increases the return to capital and to the labour of the newcomers (that’s why they migrate and holders of capital, both commercial and education, tend to be so pro-migration). It is much more dubious that migration inherently increases the return to the labour of existing residents. Particularly if adding all those non-voting non-citizen market entrants increases, say, the regulatory restriction of land use, increasing shelter costs.

    As for open borders, that’s just nuts. The idea that social, political and physical infrastructure is infinitely flexible is deeply silly. Or that all migrants are interchangeable in their characteristics and effects (that’s one area where representative agent models are REALLY silly).

  13. Gravatar of Christian List Christian List
    25. November 2018 at 17:30


    you’ve compared Japan and China in the past. For example, think of the fear of Japan at that time, which you compared to the fear of China today. Why no comparison this time? What’s the reason why China doesn’t end up like Japan?


    very good points.

    I assume Canada is very similar to Australia, regarding immigration. The US in the past was also very similar to Canada and Australia, most migration was transatlantic. Or as Bismarck supposedly put it: “The Americans are a very lucky people. They’re bordered to the north and south by weak neighbors, and to the east and west by fish.”

    Since a few years the US seems to have switched to the more European Völkerwanderung style.

  14. Gravatar of Mark Paskowitz Mark Paskowitz
    26. November 2018 at 06:59


    I find your arguments for NGDPLT persuasive, and I can see the link between Australian NGDP performance and general economic success. What I don’t understand is why the RBA has delivered stable NGDP growth when (I think) this isn’t actually what they’re targeting. As far as I can tell, they have a fairly typical “inflation plus a few other things plus some judgement” mandate. So have they just not faced money demand shocks? And if so, are we back to an element of luck? Or do you think they are quietly but intentionally pursuing NGDPLT?

    Apologies if you’ve addressed this before, but I’ve been wondering about it for a long time and don’t remember having seen anything.



  15. Gravatar of Phil Phil
    26. November 2018 at 08:15


    Every time you discuss Australia’s 25+ years of no recessions, you pin the cause on their Central Bank’s monetary policy doing something like an ngdp / wage level targetting. I have read numerous articles to the contrary lately. They put the cause on high levels of population growth from immigration and point out that per capital, i.e. correcting for population growth, Australia would have had quite a few recessions over this time period. In particular, I recall you mentioning that their monetary policy is the reason they never hit the zero lower bound in the ’08 time period. But what if those interest rates were instead propped up by all the new demand from more people coming into their country and wanting housing etc.? Do you think Australia would not have had recessions over the last 25+ years if they kept their monetary policy goals but didn’t have any immigration? Could you do a post about this?

    Here are a couple of example sources:

    “But Australia’s extraordinary economic statistics mask a more difficult economic reality. At the lowest point in the spring and summer of 2013, Australia’s quarterly growth rates fell to 1.7 percent. At the same time, Australia’s population was growing at an annualized rate of 1.8 percent. Measured in per capita terms, then, Australia’s economy actually shrank for two consecutive quarters.

    Australia also experienced a “per capita recession” for four quarters during the global financial crisis and for two quarters during the dot-com bust of 2000. It recorded a quarter of negative per-capita GDP growth in 2003. Viewed this way, Australia’s economy has in fact matched every U.S. recession of the last 40 years, with one additional slowdown in the first half of 1986.”

    “Perhaps the Australian economic miracle isn’t all it’s cracked up to be. In fact, the secret ingredient in Australia’s growth strategy isn’t good economic management, the overhyped commodity super-cycle or even the rise of China. It is immigration.

    For the last several decades, rampant immigration has driven such rapid growth in Australia’s population that annual population growth has completely overwhelmed the ordinary business cycle.”

  16. Gravatar of W. Peden W. Peden
    26. November 2018 at 10:44

    Christian List,

    If China ends up with GDP per capita like Japan, then it will be the number country economically. Today, Japan has a GDP per capita that’s comparable to the UK, France, and not far behind Germany.

    Japan’s economic performance looks bad because of (1) slow population growth and (2) it doesn’t have the space for catch-up growth that it once had.

  17. Gravatar of W. Peden W. Peden
    26. November 2018 at 10:44

    * number one

    China’s population + Japan’s GDP per capita would be a stunning combination. No country has ever had that before.

  18. Gravatar of ssumner ssumner
    26. November 2018 at 13:01

    Lorenzo, Note that the US absorbed a massive volume of uneducated immigrants in the 19th and early 20th century, and did very well.

    Christian, You asked:

    “What’s the reason why China doesn’t end up like Japan?”

    I think it will, which is fantastically good news for China, almost unbelievably good news. In 1980, everyone would have laughed at that claim.

    Mark, I think it’s partly because they have not reached the zero bound. And partly because they’ve been more skilled than US policymakers.

    Phil, America had very frequent recessions back in the old days when our labor force growth was just as rapid as Australia’s has been in recent years. I’d add that while labor force growth does boost RGDP growth, it does nothing to tamp down growth in the unemployment rate. That’s why America experienced sharp increases in unemployment in recession periods, even when the labor force was growing fast.

    Also note that while Australia has fast growth in the population, America’s population is also growing, so zero population growth is not the right benchmark for comparison. You might want to look at the difference between Australian and US population growth over that period, which is a bit less than 1%/year.

  19. Gravatar of Christian List Christian List
    26. November 2018 at 13:42


    that was my mistake. I assumed from the second after my post that you would write something like that, and who could blame you.

    Of course, I’ve alluded to the fear (or hope) that China could get stuck in a suboptimal state, far away from world domination, and that certain predictions later turn out to be far too optimistic.

    Or that China ends up in a death spiral of an excessive aging of society. Or that China ends up being similarly skeptical about immigration like Japan, because immigration would be “interference in internal affairs” and because they might think that they need no immigration because they are already the center of the universe anyhow.

  20. Gravatar of Christian List Christian List
    26. November 2018 at 13:52

    Lorenzo, Note that the US absorbed a massive volume of uneducated immigrants in the 19th and early 20th century, and did very well.

    Is there like any serious data (or studies) about this? What does “uneducated” mean? “Uneducated” in comparison to what? To the Indians maybe? Or uneducation in comparison to similar groups in their homelands? I both doubt it.

    I know it sounds plausible that the poorest of the poor, the sickest of the sick, the most unskilled of the unskilled, and the dumbest of the dumb moved to the US. But is this really true? The more I think about it, the more I doubt it.

  21. Gravatar of Benjamin Cole Benjamin Cole
    27. November 2018 at 20:03

    Speaking of China, evidently Bloomberg thinks this is news:

    Jack Ma Confirmed as Chinese Communist Party Member
    Bloomberg News

    November 27, 2018, 9:06 AM GMT+7

    Jack Ma, co-founder of China’s most valuable company, was officially confirmed as a member of the Communist Party in a state-backed newspaper recognizing business leaders for their contributions to the country’s development.

    Ma, co-founder and chairman of e-commerce giant Alibaba Group Holding Ltd., is one of 100 people the Communist Party of China’s Central Committee will honor as part of a celebration marking 40 years since the country’s economic reform and opening up. The honorees also include Tencent Holdings Ltd. Chief Executive Officer Pony Ma, Baidu Inc. CEO Robin Li, basketball star Yao Ming and volleyball coach Lang Ping.


    Of course, Jack Ma is CPC. Everyone who is anyone is CPC in China.

    And the depressing article de jour re China:

    From Financial Times

    China shutters one of its only independent economic think tanks
    Hudson Lockett YESTERDAY

    One of China’s few independent economic think tanks has been forced to cease operations in the latest sign of Beijing’s growing intolerance of dissent as economic growth slows amid an ongoing trade war with the US.
    On Monday evening local time the Beijing-based Unirule Institute of Economics announced that “in the current institutional environment in China, unless normal protection by the Constitution and laws is confirmed, Unirule . . . will cease public activities under its name temporarily”, after the business license of its affiliate company was revoked.


    China is opening up!

  22. Gravatar of Todd Kreider Todd Kreider
    28. November 2018 at 08:00

    Scott wrote: “Remember that in 1980 China was poorer than India and much of Africa.”

    China was not poorer than much of Africa in 1980, nor was China poorer than India based on Maddison’s Project Database 2018 of GDP per capita in $2011:

    China $1690; $1530

    India $1140; $1250

    The guide says the first set is better for cross-country income comparisons while the latte is better for cross-country growth comparisons, so I guess the first is the one to use.

  23. Gravatar of Willy2 Willy2
    1. December 2018 at 09:26

    – Regarding the Economist article:
    1) the charts don’t go further that late 2016/early 2017 and therefore don’t include the economic developments of 2017 and 2018. In 2017 and especially 2018 (this year) have seen some VERY dramatic changes in the australian economy. And NOT for the better.
    2) The economic growth in both China and Australia was the result of a giant expansion of credit. In both countries the debt to GDP ratio kept going through the roof after 2008.
    3) Yes, one of Australia’s sources of income is “Education”. But these students see an education in Australia as a way to earn australian citizenship. It’s a concealed effort to migrate to Australia.

    – Australia is in the 1st stage of an economic collapse. I know one Scott Sumner likes to look at data. Well, Corelogic (a company that tracks the developments in the australian real estate markets) reported that house prices in Sydney have fallen by 2% in both October and November 2018. And that’s a RECORD drop. This kind of drop is the largest since the australian recession of 1982/1983.
    – No, no matter how much the RBA lowers rates, the collapse of the australian economy is here !!!!
    – Does one S. Sumner what Steve Keen has said in the past ?

  24. Gravatar of Willy2 Willy2
    3. December 2018 at 23:07

    – Nice article from WOLFSTREET: “Update on the Housing Bust in Melbourne & Sydney”. Real estate prices in both cities have dropped some 9% over a preiod of 12 months.

    A drop of 9% in 12 months is HUGE !!! Is one Scott Sumner still convinced that there is no bubble in Australia ?
    – Using Steve Keen’s (in-)famous formula (Income + change in debt = aggregate demand) Australia already has been for some 14 months in “a recession”.
    – No, Australia is NOT “chugging along” (anymore). And the RBA can’t do othing to ease the (financial) pain.
    – And now the real estate bubble in New Zealand is also in the first stages of deflating.

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