China: The glass is now 51% full

For those who have trouble with framing effects, let’s get this out of the way up front:

1.  China has very bad economic policies

2.  China has very bad human rights policies

3.  China has very bad environmental policies

Now can we talk about the more interesting first derivative?

China is improving in all three dimensions and the new reform package accelerates the pace of change, particularly in the area of human rights.  The Hang Seng index soared today on the news:

China’s broad-based reform plans got a thumbs-up from the markets, with Hong Kong and mainland shares climbing Monday, leading regional gains, with positive cues from Wall Street Friday providing a fillip.

Hong Kong’s Hang Seng Index jumped 2.7 percent to end at 23,660.1, its highest close since February, while China’s Shanghai Composite tacked on 2.9 percent to end at 2197.22.

China will avoid the middle income trap because the Chinese government’s overriding objective is to avoid the middle income trap.  Brazil did not avoid the middle income trap because that wasn’t the overriding objective of the Brazilian government.  If avoiding the trap meant shifting 10% of Brazilian GDP from public employee pensions to infrastructure, then it was not worth the price.

The best way to analyze China is to ignore levels and focus on first derivatives. Pay no attention to the current structure of China (political/economic/cultural/etc), as China will be totally different in 30 years, just as the current China is totally different from the China of 1983.  The current Chinese government has no say in what the China of 2043 will look like, because it will be ruled by completely different people, living in a completely different world, with completely different attitudes.  That’s the price the CCP will pay for making China into a great power.

PS.  Check out Shenzhen’s new airport:

Screen Shot 2013-11-05 at 2.14.42 PM

Terminal Paradiso.  A mile long. Lots of larger pics at the link.

Prediction:  When Shenzhen and Hong Kong merge in 2047, Shenzhen won’t be stuck in a middle income trap.



20 Responses to “China: The glass is now 51% full”

  1. Gravatar of W. Peden W. Peden
    18. November 2013 at 08:37

    The middle income trap has always seemed a dodgy idea to me. I think it’s less that there’s a trap at the top and rather that there’s a relatively easy ladder at the bottom via catch-up growth, which can be climbed by countries without the culture, institutions and policies to full catch-up in income terms.

    The experience of Chinese emigrants around the world suggest that they have a good culture for business and aside from a few areas (e.g. Hong Kong) the government’s policies seem to be in the right direction, so it comes down to institutions, and I really don’t know enough about Chinese institutions to comment on that.

  2. Gravatar of Saturos Saturos
    18. November 2013 at 10:01

    Also, China will avoid the middle-income trap because apparently talking about the collective entity “government”‘s overriding objective is actually a meaningful description of how that organization will actually behave.

    Don’t you think that the government of 1983 had some say in what today’s China looked like, and who today’s China’s leaders are?

  3. Gravatar of ChargerCarl ChargerCarl
    18. November 2013 at 10:32

    I personally don’t see Chinese human rights improving nor do I think they will in the near future. In this regard I think we’re over optimistic.

  4. Gravatar of LC LC
    18. November 2013 at 11:31

    Slight quibble: “That’s the price the CCP will pay for making China into a great power.”

    It’s not CCP that’s making China into a great power. It’s the CCP getting out of the way of Chinese people that’s going to turn China into a great power. It has been a long process, and it will continue to be a long process, but the direction is clear.

  5. Gravatar of ssumner ssumner
    18. November 2013 at 11:51

    Saturos, It set in motion the trends that led to where China is today, but they’d be horrified by modern China, with it’s Ferraris driven by billionaires zooming past poor peasants, sometimes killing them with impunity. Most government officials back then were communists. Actual communists. Then there are the cultural changes–the sexual revolution, gay rights, etc. Would they approve of those changes?

    Chargercarl. Eliminating labor re-education camps, greatly reducing use of the death penalty, and greatly weakening the one-child policy don’t improve human rights? Your definition must be very different from mine.

    LC, That’s a fair criticism.

  6. Gravatar of Brett Brett
    18. November 2013 at 11:58

    China will probably dodge the Middle Income Trap because they’re already close to doing so in the areas that matter the most – the coastal cities. They’re also managing to build up some of what helped prior East Asian countries climb up into Rich Country status: strong business connections and supply chains worldwide (particularly in Africa), strong multinational corporations driving independent research, and good absorption and utilization of advanced technology in production.

    If they manage to get away from the sinkhole that is the SOE sector (returns below capital), they’ll be even stronger. I think that might be why they’re finally allowing the formation of private banks, even if they’re only supposed to be “small” and “medium” size.

  7. Gravatar of benjamin cole benjamin cole
    18. November 2013 at 12:28

    The People’s Bank of China has shown “a revealed preference for growth” according to the Hong Kong Monetary Authority.
    This has been key.
    The real threat to China: Their central bankers will become independent and no longer report to the CCP.

  8. Gravatar of ssumner ssumner
    18. November 2013 at 13:39

    Brett, Exactly.

    Ben, Good point.

  9. Gravatar of Bababooey Bababooey
    18. November 2013 at 15:34

    China will avoid the middle income trap because the Chinese government’s overriding objective is to avoid the middle income trap.

    The Chinese government is an aggregate group of individuals, the majority of whom have the overriding objective to feather their nest and care for their F&F. Those objectives are best accomplished by trade with the richest, most powerful individuals, whose overriding objectives are probably to keep the status quo that delivered riches and power in the first place.

    Usually the status quo is overriden not by establishment druthers, but forcibly overridden by events or by outsiders.

  10. Gravatar of ChargerCarl ChargerCarl
    18. November 2013 at 17:06

    Scott what you said istrue, however the CCP has gotten even worse when it comes to things like press freedom.

  11. Gravatar of xtophr xtophr
    18. November 2013 at 19:22

    As a faithful yet dim-witted reader, one of the hardest things for me to reconcile is that you seem opposed to fiscal stimulus for western economies (multiplier is zero, fiscal spending is offset by central bank timidity, yada, yada), yet enthusiastic about China’s future, which seems to be driven largely by central planning and government investment in infrastructure.

    I know, I know, I don’t get it. Can you explain it like I’m five?

  12. Gravatar of Geoff Geoff
    18. November 2013 at 19:42

    “For those who have trouble with framing effects, let’s get this out of the way up front:

    1. China has very bad economic policies

    2. China has very bad human rights policies

    3. China has very bad environmental policies

    Now can we talk about the more interesting first derivative?”

    I’d love to see a detailed analysis of 1. But all I see are passing mentions of it, to pay lip service, but the core of the posts are all China flag waving hurrahs.

  13. Gravatar of Jim Glass Jim Glass
    18. November 2013 at 21:12

    The “middle income trap” is typically presented as some kind of powerful yet ephemeral and unexplained force {like Star Trek’s “barrier at the edge of the galaxy”).

    But an empirical look at its elements is given by Nobelist Douglas North and his co-authors in their book Violence and Social Orders. One point they make is that economic development is universally accompanied by, and apparently requires, rapid growth in the number of “organizations” that legally self-organize and have the legal right to operate to pursue the interests of their owners/members/stakeholders, independent of the state.

    These include, well, pretty much everything: political parties, corporations, unions, charities, churches, universities, scout troops, homeowners’ associations, small businesses, social clubs, pension funds, banks and financial companies, media outlets, whatever. (But not state-run unions, state churches, state banks, state-run media, etc.)

    As these groups organize, grow in number and interact in countless ways, they increasingly compete away originally existing monopoly arrangements and state powers, sometimes simultaneously competing and allying to deal with a common foe (e.g.: corporations and unions joining to win the Citizens United case against the politicians). They increase economic and social competition, innovation, horizontal transfers of information, etc…

    They also provide the real democratic representation in modern free democratic states. Elections don’t. Authoritarian regimes everywhere have free elections at no risk to themselves. In the USA, the re-election rate for incumbents everywhere is over 95%, and near everybody can’t even name most (if any) of the legislators “representing” them. And even if one can, you get a vote only once every X years, if the election is contested, and as that is only one vote cast once up-or-down, you have no means whatsoever of getting any legislator to represent you on an issue-by-issue basis regarding all the issues that are important to you.

    But through these independent organizations you do. If you are the owner of a business, your spouse is a member of a labor union, your child is in a scout troop, you join the homeowners association, have a bank account, plus a pension account, and go to church … every one of those organizations has a lobbyist that does represent your interest at the legislature by individual issue, year round. What other representation do you really have? (Puts a whole different light on “special interests”.)

    But back to this element of the barrier. The wealthiest nations with 17% of world population have 83% all such organizations, while nations with per capita income of $5k to $10k have 20% of population but only 6% of organizations, etc.

    The point here is that *no* nation has moved up to the top ranks without dramatic growth in the number and kinds of such independent organizations — and many regimes block such growth to protect their own political power and interests in wealth. And many of those very regimes have had very impressive growth up to a point, only to have it come to a dead stop. No regime that has successfully blocked the dramatic growth of such organizations has had previously impressive economic growth carry through.

    Of course, authoritarian regimes (such as Communists) upon coming to power typically systematically destroy such organizations, replacing them with authorized political parties, state media, state-run labor unions, and so on, and we’ve all seen the results of that.

    China will avoid the middle income trap because the Chinese government’s overriding objective is to avoid the middle income trap.

    Maybe so, but that seems to assume what is to be proven. Does the Chinese govt put beating the middle income trap above preserving its own political power? Most governments — empirically, the great majority — have gone the other way.

    I’m ignorant about China and I don’t know, have no clue about it.

    But this pattern that North & Co point out may provide an objective indicator to watch as a clue (instead of just engaging in battles of subjective opinions). Is the Chinese government opening up the process of creating and encouraging the growth of legally authorized, free-of-the-state business/social/civic organizations? Or is the Communist Party trying to maintain its control over such organizations, as a first priority?

    That is the sort of indicator that people ought to be able to be objective and empirical about, to be able to monitor by counting.

  14. Gravatar of J.V. Dubois J.V. Dubois
    19. November 2013 at 02:22

    Jim Glass: That is right. I assume that Scott just looks at outcomes and tries to extrapolate. And I have to agree – the trends are there. If China actually improves the overall well-being of its population one can assume that there will be all these organizations behind doing their job. Plus there already are countries with chinese population that managed to overcome the middle-income trap (Taiwan, Singapore, Hong-Kong) and most importantly there already are regions in China where this “trap” is already being overcome.

    PS: Btw I loved the “Violence and Social Orders”. It was an real eye opener and since then I found most political discussion quite dull. Not unsimilar to how I find macro discussions dull after following Market Monetarists for some time. Shame that North does no blogging – at least not that I am aware of. Plus the part on English medieval history was excellent an icing on already tasty cake that sealed the deal for me.

  15. Gravatar of rob rob
    19. November 2013 at 04:32

    I actually had a really long conversation with a party member before the summit, they already knew what was going to happen and I was very surprised to hear that the reason behind all of the forward thinking policies was because they were afraid of the middle income trap. I am continually surprised to the extent that they listen to economists. The Chinese government understands that right now the have an opportunity to grow and they don’t want to waste it. The main problem is a lot of the growth is still driven by the desire for ever greater rents, but I hope that will evolve away. By the way I heard that they definitely want to start easing down on the hukou system but they are afraid of the chaos from rapid rural to urban migration. Overall though I am continually bayesianly updating in a fairly optimistic direction with regards to China.

  16. Gravatar of ssumner ssumner
    19. November 2013 at 09:29

    Bababooey, I don’t agree. I think the trend is clearly toward greater liberalization because that will make China richer and more powerful. And check out Rob’s comment.

    ChargerCarl, Yes, but overall the trend is clearly toward more human rights.

    xtophr, First derivative, first derivative, first derivative . . . .

    China has a bad (statist) model, that’s why it’s really, really poor.
    China is gradually reducing the role of the state, that’s why it has a bright future.

    Jim, Yes, they are allowing more and more private organizations.

    JV, Good point.

    Rob, Very insightful.

  17. Gravatar of TallDave TallDave
    19. November 2013 at 14:13

    “China will avoid the middle income trap because the Chinese government’s overriding objective is to avoid the middle income trap.”

    Would that it were so. They’re far more interested in staying alive, and rich, and in power. Those priorities are starting to become misaligned with growth, and growth isn’t likely to win.

    Note that even after all their growth, China is still significantly poorer than Brazil.

  18. Gravatar of ssumner ssumner
    20. November 2013 at 20:06

    TallDave, If they were as corrupt as you say, they would not be building a ton of infrastructure.

  19. Gravatar of Geoff Geoff
    20. November 2013 at 20:22

    “If they were as corrupt as you say, they would not be building a ton of infrastructure.”

    Corruption is engrained in so-called “infrastructure”. Special interest group pleading and dealing, such as the road lobby, the education lobby, the healthcare lobby, the utility lobby, is corruption.

  20. Gravatar of AbsoluteZero AbsoluteZero
    4. May 2014 at 18:22

    TallDave: “Note that even after all their growth, China is still significantly poorer than Brazil.”

    Depends on what one means by “significantly poorer”.

    IMF data, end of 2013, GDP (PPP) per capita:
    Singapore 64,584
    Switzerland 46,430
    US 53,101
    UK 37,307
    Japan 36,899
    France 35,784
    Brazil 12,221
    China 9,844

    France/US = 67.4%
    Japan/US = 69.5%
    UK/US = 70.3%
    Switzerland/Singapore = 71.9%
    China/Brazil = 80.5%
    US/Singapore = 82.2%

    Would people say France, Japan, or the UK are “significantly poorer” than the US? Would people say Switzerland or the US is “significantly poorer” than Singapore?

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