Tyler Cowen has a new Bloomberg article discussing why China may never democratize:

The argument that China will become democratic rested on observations of Japan, Taiwan and South Korea, all nearby countries that became democratic or sustained a democracy once they were sufficiently wealthy. The middle classes in these countries wanted accountable government, and ultimately the autocracies were willing to step aside and support democratic transitions, albeit with the Japanese path being more closely linked to the American postwar settlement and occupation. Much of Eastern Europe and Latin America became democratic too, and so it seemed plausible that China might be next in line.

Conversely, there are two powerful arguments that China will not become democratic. First, China never has been democratic in thousands of years of history, and perhaps that history simply will continue.

Second, the middle to upper middle class is still a minority in China, and will stay so for a long time. A smaller country can build up in percentage terms a larger middle class, by exporting, than can a very large and populous country. There’s just not enough demand in global markets to elevate all or even most of the Chinese people, and so Chinese inequality likely will stay high, to the detriment of democratic forces.

In essence, many of the wealthier Chinese trust the Communist Party to look after their interests more than they trust elections.

Both of these arguments are wrong, although the final sentence I quoted is entirely accurate.  Many affluent urban Chinese do not support democracy because they worry that it would turn the country over to the rural poor.  Today.

Nonetheless, both of Tyler’s arguments are wrong:

1.  The fact that China has thousands of years of non-democracy carries exactly zero weight, because all countries had thousands of years of non-democracy before becoming democratic. It’s simply not a “powerful argument”—it carries no weight. So the fact that East Asia is increasingly democratic is very relevant.  Those East Asian democracies also had thousands of years of non-democracy before first becoming democratic.

2.  And it’s true that the middle and upper middle class are still a minority in China, but it is not true that things will stay that way for a very long time. China will be mostly middle class by 2050. A big issue in China today is the fact that working class wages are rising faster than professional white collar wages, and indeed are often higher. College grads complain that factory workers and construction workers make more than they do.  And all wages are rising very fast.

In my view the relevant odds are as follows:

1.  Odds of China becoming democratic:  95%

2.  Odds of China never becoming democratic, and most of the rest of the democratic world reverting to authoritarianism:  4.99%

3.  Odds of China never becoming democratic, but most of the rest of the developed world staying democratic:  0.01%

So if China really never does become democratic, the real story is that democracy will fade away in the rest of the world.  It’s simply not plausible that we’d continue on for hundreds of thousands of years with China non-democratic and South Korea, Japan and Taiwan democratic.  That’s not how things work.  Something has to give.

You can’t be pessimistic about China and optimistic about the world, at least in the very long run.

PS.  Here’s China Daily, telling white collar workers to stop complaining that blue collar workers make more than they do:

Manual workers deserve the high wages they get

DATA ON AN employment exchange website show the average monthly income of construction workers in Chengdu, Sichuan province, was 8,300 yuan ($1,210) last year, with skilled bar benders, bricklayers, carpenters and painters earning more than 10,000 yuan. In contrast, the average monthly salary of clerks and secretaries was about 3,800 yuan. An article on youth.cn comments:

The huge income gap between blue-collar and white-collar workers may be surprising for many people. But manual workers’ incomes have been rising over the past few years because of the supply-demand law.

Each year, 7 million college graduates enter the job market, while the number of skilled laborers joining the workforce is much lower, because it takes years for a worker to become an expert in his/her field while clerks can learn their job in months.

If blue collar workers really are making $15,000/year, in a country with a much lower cost of living than the US, then I may be excessively conservative in my 2050 date for a majority of China being middle class.  It’s coming faster than almost anyone imagined.

HT:  TravisV

Over the past 18 months we’ve seen three major shocks, each of which were expected to have a significant impact on growth:

1.  The late 2015 Chinese yuan devaluation/capital outflow shock

2.  Brexit

3.  The Trump election

Many people expected the Chinese economy to slow sharply in 2016.  It didn’t.

Many people expected the UK economy to slow sharply after mid-2016.  It didn’t.

Many people expected growth and inflation to rise significantly after Trump was elected.

The third prediction still might come true, but this FT article suggests that investors are moving away from the “reflation” trade.

We are nearing the anniversary of a great market turning point. Like most such turning points, it was not obvious as such at the time, but in early July last year markets reached the lowest point of their fear of deflation — falling prices amid a stagnating economy — and started to position for reflation.

The shock of last summer’s Brexit referendum brought bond yields, the market’s most direct expression of its belief in deflation, to a historic low. The rebound started as the effects of China’s economic stimulus were felt, while it grew clear that Brexit had not sparked a financial crisis.

It gathered momentum after Donald Trump’s victory in the US presidential election. The theory was that the Trump administration would pick up the baton from China, which looks over-leveraged and will soon need to ease off its stimulus, and would bring in its own growth-friendly policies, including tax cuts and infrastructure spending. From “reflation off”, we moved emphatically to “reflation on”.

Stock markets have risen this year, but 2017 has seen a gradual shift back to “deflation-off”. Short-term inflation expectations have moved sharply in recent weeks. The bond market’s implicit forecast for US inflation over the next two years, once at 2.15 per cent, has dropped to 1.35 per cent.

In each case I expected some effect, but less than the consensus.  In the case of China and Brexit, even the very mild slowdowns I predicted proved too bearish. I’ve learned my lesson from Brexit, and in the future will pay no attention to “uncertainty shocks”.  Always a skeptic, I am now convinced that uncertainty has virtually no significant business cycle effects.  And never bet against Chinese growth. Someday it will falter, but no one can predict when.

[In macro, the forecast most likely to be true is, “Not much will change”.  However the way to build a reputation is to forecast dramatic changes.  You will usually be wrong, but the public will forget those mistakes and give you undeserved praise on the few occasions when you are correct.]

I’m sticking with my prediction that Trump’s policies might lead to a couple tenths of a percent faster NGDP growth.  Monetary offset will keep inflation close to 2%, and Trump’s supply-side reforms are likely to be modest (at best).  An extra couple of tenths of one percent NGDP growth is so small it will be almost impossible to tell if I am correct—especially given that growth is likely to slow as we approach full employment.  If there is a recession, however, or 5%-6% NGDP growth persisting for a few years, then I will clearly be wrong.

Maybe the French will give us another shock later today.

PS.  I still believe that Brexit itself will reduce UK growth.  This post discusses the effect of pre-Brexit uncertainty, not Brexit itself, which is still years away.

PPS.  I believe the US should withdraw from the IMF.  Not because the IMF is not good enough for the US, rather because America is not good enough for the IMF. If we don’t leave, I hope the other IMF members expel us:

Finance ministers and central bankers from around the world have dropped a pledge to resist protectionism, in a further sign that the new US administration’s stance on trade is shifting the global debate.

The group from International Monetary Fund member countries issued a statement on Saturday saying they would “promote a level playing field in international trade” but did not reiterate a previous commitment to “resist all forms of protectionism”.

The change of stance mirrors a similar move made by the finance ministers and central bank governors of the G20 countries after they met in Baden-Baden in March. On that occasion, the US was unwilling to endorse forthright language on protectionism.

Sad!

This is not fake news:

Average wages in China’s manufacturing sector have soared above those in countries such as Brazil and Mexico and are fast catching up with Greece and Portugal after a decade of breakneck growth that has seen Chinese pay packets treble.

Across China’s labour force as a whole, hourly incomes now exceed those in every major Latin American state apart from Chile, and are at around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International, a research group.

And here’s a graph of real wage growth (not PPP adjusted):
Why is this important?  Because year after year we see China pundits predicting a crash.  When it doesn’t happen, some people claim the GDP numbers are “fake news”.  The problem with these arguments is that the Chinese wage numbers (showing real wages growing at 10.5% annually over the past 11 years) are consistent with the reported gains in GDP.  So the Chinese government would have to get its 1.4 billion people to participate in The Great GDP Cover-up, by getting them to also lie to reporters about their wage gains.

My wife recently mentioned that her mother was now paying 35 yuan/hour (i.e. $5/hour) to her maid, a sum that her mother found completely mindboggling.  So what’s the theory? Is my mother-in-law participating in the cover-up, lying to her daughter?  Or maybe my wife is fabricating Chinese wage numbers, to make her homeland look good.  Perhaps I married someone in the Chinese propaganda ministry.

Hmmm . . . that would explain . . .

Seriously, it’s time for people to face reality.  China is not a bubble; it’s a very successful developing country. The GDP data is real, even if it’s nominal. China may well have a debt crisis at some point in the next decade or two, but like South Korea it will recover and move into the high income category.

PS.  If anything, the wage data suggests that China may be understating its GDP growth, as China’s reported GDP (PPP adjusted) is still well below the levels of Mexico and Argentina.

PPS.  When China’s crash does occur, you can be 100% sure I will have failed to predict it.  Just as I promise you I will fail to predict the next US recession.  And the next stock market crash.

Scott Alexander recently linked to a graph showing PISA scores by country and by income deciles within countries. Three that caught my eye were Argentina, Chile and Uruguay. These are three countries with populations of Western European descent, and are also the only three countries in South or Central America with per capita GDPs above $20,000.  But the Southern Cone does appalling bad at taking PISA exams, scoring among the lowest of all countries on the list.  Argentina is even lower than (much poorer) Brazil and Tunisia, something I would not have expected.  Argentina also scores extremely low on indices of “Economic Freedom”.

Argentina’s an interesting case to think about.  It’s a sort of composite of the worst of Chile and the worst of China.  Chile scores extremely high on economic freedom, the only developing country in the top 10 (unless Estonia is viewed as developing).  Argentina ranks 156 out of 180.  China’s sort of the opposite of Chile.  It ranks pretty low on economic freedom (#111), but (probably) pretty high on PISA scores.  I say “probably” because the scores being reported are for Shanghai, which is definitely smarter than the average Chinese city or village.  Indeed Shanghai scores above any other country in the world, including high achieving city-states like Hong Kong and Singapore.  Nonetheless, based on other studies I’ve seen, I am confident that China would still do pretty well on a more national PISA exam.  Perhaps about at Vietnam’s level.  (Vietnam is roughly comparable to Finland, and far above the US, UK or Sweden.)

So Chile and China each have one good trait and one bad trait.  Argentina has the bad trait of each.  Argentina’s a classic example of a glass half full/half empty situation.  From one perspective, you might expect Argentina to be rich.  It’s mostly settled by Western Europeans (I think it might be the most Western European country in all of North and South America), and those countries are usually pretty developed.  But Argentina’s per capita GDP seems to be either lowest in the world for ethnic Western European countries, or second lowest (I had trouble getting racial data for Costa Rica.) A hundred years ago it was among the world’s richest countries.  It has a world-class port, and rail lines fanning out across some of the world’s most profitable farmland.  It’s got lots of mineral resources.  It’s technically sophisticated, completing Latin America’s first nuclear power plant way back in 1974.

Chile’s population is also primarily Western European, but considerably less so than Argentina.  Chile also scores very low on PISA, but not as low as Argentina.  And of course Chile has far more economic freedom.  (Just to complete the Southern Cone, Uruguay is in between the two in terms of education and economic freedom, and also GDP/person.)

China is poorer than the Southern Cone.  But that may be misleading; as it’s clearly growing faster and hasn’t reached the “middle income trap” that the Southern Cone seems to have reached.  China’s high PISA scores are consistent with the high scores in other ethnic Chinese/Japanese/Korean/Vietnamese areas, but NOT other parts of Asia.

I’d like to claim that some combination of economic freedom and PISA scores explains wealth, but I see too many exceptions.  Mexico scores higher than Argentina on PISA tests, and also far higher on economic freedom, but is poorer.  Why?

Sweden is much richer than Finland, despite doing dramatically worse on PISA, and being fairly similar on economic freedom.  Maybe the answer here is that PISA and “economic freedom” don’t always measure what we might assume.  Take the Heritage Economic Freedom Index.  Argentina is down there with countries like Uzbekistan, New Guinea, Niger, Haiti and Afghanistan.  I don’t know about you, but if I were opening a new winery, I think I’d prefer the Mendoza area to Afghanistan or Niger.  Indeed reading the Heritage description of Argentina makes me wonder why it ranks so low. As far as PISA scores, I wonder if they measure the sorts of skills required for a modern economy.  According to The Economist, Swedes are the most computer literate of this set of countries, despite scoring relatively low on PISA tests.

 I do think both the Heritage rankings and the PISA scores are correlated with what we think they measure (which might be ease of starting businesses and keeping the wealth you create for the Heritage index, and ability to do complex jobs for PISA).  The question I have is whether the outliers we see, such as Argentina and Sweden, are due to flaws in these two metrics, or because there are other factors that influence development, which go beyond economic freedom and intelligence/education.

At the bottom, I have (IMF) estimates of GDP per person in 2016 for the top 91 countries.  A few things worth noting:

1.  The US continues to be inexplicably rich.  Among “normal countries” (i.e. not oil rich, tiny, multinational dominated and/or city states) only Switzerland scores higher.  And number three (Netherlands) is more than 10% lower than the US.  We are no longer top 10 in economic freedom, and our PISA scores are mediocre.  So why are we so rich?  Because we are large?  But lots of small Northern European countries are high on the list.

2.  Spain finally surpassed Italy, after many decades of gradually catching up.  Wait, wasn’t Berlusconi going to Make Italy Great Again?  Seriously, I wonder if a combination of population density and regulatory complexity make if much harder to do major projects in Italy than Spain, like large new real estate developments.  Can anyone confirm?

3.  South Korea is now very close to overtaking Japan.  That may be partly due to the fact that Koreans have lower taxes and work more hours.

4.  China finally overtook Brazil, and it looks increasingly like they will overtake Mexico by 2030, (allowing me to win my bet with Talldave.)

5.   Malaysia overtook Greece and will soon overtake Portugal.  It seems increasingly likely that Malaysia will escape the “middle income trap”.

6.  There used to be a lot of articles about how the former Soviet bloc’s transition to capitalism had failed.  But there are now 5 former communist countries that are richer than Greece and Portugal, with the Czech Republic leading the way.

7.  All you need to do is look at countries #31 to #35 to realize that GDP/person (PPP) can be extremely misleading.  I wonder about some of the figures.

The Constitution:

No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.

And in today’s news:

According to ABC News, Trump received a big, fat gift from China this week in the form of a 10-year trademark on his name for construction. . . .

The award marks a sudden reversal of fortunes for Trump, who had reportedly been trying to win the valuable rights to his name for a decade. Interestingly, the Chinese government came through for him one month after he took the oath of office and a week after his conversation with Chinese president Xi Jinping during which he endorsed the One China policy. After years of battling to take back the rights to his name from a man named Dong Wei, Trump’s registration was made official on Tuesday and announced by China’s trademark office on Wednesday.

There are going to be some Trump critics who are so unhinged in their hatred for the man that they’ll see a link here.  But as Trump’s lawyer points out, in China legal decisions involving heads of state of the world’s greatest superpower are made my honorable judges, with no interference from the leadership of the Chinese Communist Party:

Trump’s attorneys in China say the ruling in his favor was made on the strength of his legal claim, not his position. “It is not possible that President Trump got favors from Chinese government,” Zhou Dandan of Unitalen Attorneys at Law in Beijing told The Washington Post. Alan Garten, chief legal officer at the Trump Organization, told the Associated Press that Trump’s trademark application predated the election.

It’s pure coincidence that a legal battle Trump was fighting for 10 years got resolved a week after he caved on the One China policy.  Why are you people so cynical?

I’m also increasingly sickened by the biased new media.  Take Shepard Smith, from the king of fake new outlets, Faux News, I mean Fox News:

He took his disapproval to new heights on Thursday, deriding Trump shortly after his first solo presidential press conference.

“Your opposition was hacked and the Russians were responsible for it and your people were on the phone with Russia on the same day it was happening and we’re fools for asking the questions? No, sir,” Smith said on air.

“It’s crazy what we’re watching every day… It’s absolutely crazy. He keeps repeating ridiculous, throwaway lines that are not true at all and sort of avoiding this issue of Russia as if we’re some kind of fools for asking the question. Really?”

He added: “We have a right to know… You call us ‘fake news’ and put us down like children for asking questions on behalf of the American people.”

Why can’t Fox find some unbiased reporters?  Trump won the greatest election victory since Reagan (except for Bush, Clinton and Obama), please show some respect!

Trump’s pal Duterte is also being treated rudely by the press:

Policemen from the national drug squad, including senior officers, falsely accused a South Korean businessman of involvement in narcotics. They hauled him off to the national police headquarters in Manila, demanded ransom from his family, pocketed the money and then strangled him, burning his body and flushing the ashes down a lavatory. . . .

Mr Duterte reacted to the scandal in typical fashion, holding a press conference in which he revealed a vague plan through a rambling monologue punctuated by coarse exclamations. “You son of a whore!” he said, addressing himself to the drug-squad officer suspected to be the mastermind of the kidnapping. The president offered a reward of 5m pesos ($100,000) for his capture. “Dead or alive,” Mr Duterte said. “If you bring him dead, the better.” Mr Dela Rosa leant in to whisper to the president that the officer was already in custody. Mr Duterte ploughed on, inveighing against the police force in general, which he described as corrupt to the core. “You use the power to enforce the law and arrest people for shenanigans,” he said. “Almost 40% or so of you guys are habituated to corruption.”

This is the 21st century folks.  Don’t you understand that press conferences are now “performance art”?  Truth is so 20th century.  Boring.

PS. I can’t even imagine what SNL is like in the Philippines.