China will fail

I often visit China, and each time I’m struck by how much freer it seems, how much more market-oriented.  But if you rely on the press, you’d think it is getting less free, less market-oriented.  They will usually say something like “after an initial burst of initiatives, the reform process has recently gone into reverse.”  The same reports are written about Indian economic reforms.  Or economic and political reforms in many other countries.  Be highly skeptical of these reports.

Obviously there are cases where economic and political reforms go into reverse.  Venezuela is a good example.  More often, however, the press falls victims to its usual bias–it’s news when a house burns down, but not when it’s built.

The powerful forces of neoliberalism and globalization are gradually making most countries freer and more market-oriented.  When I first visited China in 1994 it seemed like a communist country.  Now it seems mostly non-communist, although the communist presence is still quite significant.  It also seems much freer.  Yet virtually every year in between 1994 and 2011 I have read news articles about the market and political reforms being reversed.

The mistake people make is that reforms tend to be gradual and invisible, while setbacks are abrupt, disconcerting, and highly visible.

Martin Wolf recently wrote an article entitled “How China could yet fail like Japan.”

Define “failure.”  In 1980 China was poorer than India, poorer than sub-Saharan Africa.  Yes, if Japan is “failure,” then China will probably fail.  Indeed I guarantee China will “fail,” because the news media reports failure, not success.  Especially if you are a big and messy country.  How could China not fail?  Can you imagine a China that doesn’t have big problems; that lacks problems worthy of media attention?

PS.  I love this Ryan Avent post on China, which deflates the so-called “Chinese miracle.”



16 Responses to “China will fail”

  1. Gravatar of Richard W Richard W
    10. July 2011 at 11:20

    I don’t think Ryan Avent has been to Cyprus if he thinks it has over 10 million of a population. It is basically a holiday island with less than 1 million of a population.

  2. Gravatar of Contemplationist Contemplationist
    10. July 2011 at 16:12


    You probably know a lot more about China than a layman like me, but have no doubt – the reforms in India have been stalled since 2005. It is intensely frustrating. The ruling coalition had previously excused itself by pointing to the intransigence of the Communist Party of India (Marxist) [it’s coalition partner] as the reason for no further reforms. Since the election of 2009, the same coalition (minus the CPI(M)) is out of excuses and have pursued populist socialist policies of large scale inefficient redistribution and no reforms still.

  3. Gravatar of Scott Sumner Scott Sumner
    10. July 2011 at 19:08

    Richard, Yes, that was a typo.

    Contemplationist. I don’t agree, I recently read that there have been continued reforms in India–I wish I had saved the article.

  4. Gravatar of Jim Glass Jim Glass
    10. July 2011 at 20:17

    Demographics may not be everything in economics, but they are the the foundation of everything in “international economic power rankings” — and they are all working against China and for the USA.

    The USA has the best population demographics of any major economy in the world, which is maybe surprising for all we hear of what the cost of Medicare and Social Security threaten to do to us — but “the other guys have problems too”.

    China has arguably the worst demographics in the entire world thanks to the one child policy. It has *absolutely* the worst approaching “senior citizen support” problem — heading to a 1.5 to 1 worker-retiree ratio with *no* national social security, senior health care or private pension systems … and now nowhere near enough children to care for their parents directly. (There’s a reason for that 50% savings rate.) And that’s if everything else goes *great* for China — which it won’t.

    Over 2010 to 2050 the working age population in the Top Six nations by GDP is projected to…

    * Grow 24% in the USA.

    * Decline 21% in China, 35% in Japan, 25% in Germany (16% in the EU as a whole), and 36% in Russia.

    So for all we hear about China’s huge and growing population, its working age population is peaking right now and will soon start falling in absolute terms. In 2050, the USA’s working age population relative to China’s will be 57% larger than it is today. That’s a lot!

    The only other country in the Top Six to increase its working age population will be India, by 43%. But India’s per capita GDP is only 7% of the USA’s.

    Also, the USA’s projected working-age to retiree-age population ratio is the best (well, least bad) of all — including India’s. Over the same period this is projected to decline by: 11% in the USA, 23% in China, 25% in Japan, 12% in India(!), 14% in Germany (16% in the EU as a whole), and 18% in Russia.

    So population numbers are actually working *for* the USA and against everybody else — especially China! — in the world GDP rankings going forward for another 40 years.

    As far at that goes, the 21st should be another American century as far as we can see. The 22nd, maybe India’s.

  5. Gravatar of Jim Glass Jim Glass
    10. July 2011 at 21:59

    (Sorry about the mistake in the formatting in my prior comment. I format by habit, but as there is no edit or delete button here I shall restrain myself in the future.)

    About China’s GDP, starting with the basics, there are serious doubts in some quarters about whether the claimed growth rate is real to begin with. For instance, as expressed by Lester Thurow here. (Another small tip-off may be how frequently in the past yearly results have been announced before the end of the year.

    China’s gov’t has all the means and opportunity to exaggerate its growth rate — along with a whole lot of motive to do so.

    The Communist government has a serious legitimacy issue, both at home and abroad. Its original legitimacy as a Marxist authoritarian regime came from fighting the evils of democratic capitalism. Now that it has jettisoned Marx and embraced capitalism, it’s legitimacy as an authoritarian regime comes from producing economic results *better than* democratic capitalism.

    Every time Tom Friedman writes another column in the Times about how China’s Communist authoritarian capitalists get results *better* than messy inefficient democratic capitalism produces, the regime’s international prestige and influence goes up, and its security at home is solidified. Keep those columns coming, Tom!

    But imagine if instead the regime’s primary reputation was for rolling tanks over civilians and imprisoning dissenters, while producing only a so-so growth rate for a poor country with such massive resources, primarily through a govt-directed bizarrely high investment that constructs ghost cities and bullet trains without passengers to connect them with more ghost cities — all paid for through financial repression, by taking (and risking) its citizens’ savings for which it pays below-market interest rates.

    What would its influence and legitimacy be then? That reported 10% annual growth rate is *very* valuable to the regime, and there is no competing domestic politcal party to verify it. I don’t want to move from skeptical to cynical, but…

    I’m not knocking the real growth in China. It’s movement of so many millions of people from deep poverty into the middle class in just one generation may be the greatest increase in human welfare in such a short time in history. Many kudos for that.

    But all this “China as the next superpower”, “China shows authoritarianism beats democracy”, “Chinese miracle!” stuff is product I’m not buying.

  6. Gravatar of cassander cassander
    10. July 2011 at 23:31

    China may be getting more market oriented, but America and much of Europe seems to be getting less. China, India and the rest of the developing world can have phenomenal catch-up growth, but only because there’s someone to catch up to. If we stop blazing the trail (or even blaze it more slowly than in the past) I think the picture turns real ugly real fast.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. July 2011 at 01:00

    Jim Glass: as Niall Ferguson points out, China has no old age pension. Lots of poor old people are no problem for the regime: they impose little financial burdens, then they die. You cannot translate Chinese demographics into Western demographics-with-old-age-pension.

  8. Gravatar of Rien Huizer Rien Huizer
    11. July 2011 at 03:23


    Visiting a country often is no substitute for research. And research on China is far from easy. No one (not even the leadership) probably knows where propagande, bragging etc stops and statistics begin. Besides, the economy is dominated by firms that have the state as its majority shareholder and that have a communist party cadre sitting in the boerdroom. It will take a while before that is gone, markets, neoliberalism etc or not. The people are not quite interested in self government (like the US voters who rarely show up at elections) but unlike their US counterparts, they are not wasting a great good, they have no experience with it.

    There used to be a communist term for outsiders with a sympathetic bias:

  9. Gravatar of Scott Sumner Scott Sumner
    11. July 2011 at 07:49

    Jim Glass, I don’t follow. China will easily pass the US in total GDP (very soon), the only issue is per capita GDP, where I expect the US to say ahead. The only issue in 2050 is will China or India have a bigger economy, the US won’t even be close to either of them.

    Lester’s Thurow said China would still have a smaller economy in 100 years, which is just nuts. He’ll be proved wrong in 5 years. I’ve been to China many times, and traveled all over the country. Believe me the growth is very real, and occurring at an explosive rate. In the not too distant future China will catch up to Mexico in per capita GDP (PPP), by which time they’ll be much bigger than the US. Perhaps in the very distant future the US will retake the lead, but it will be centuries away.

    Unlike Tom Friedman, I’m not a fan of China’s government. But don’t judge China by its government, or by Tom Friedman’s columns.

    Cassander, The main reason they are catching up is that they have 4 1/2 times more people. China is still pretty poor, and pretty poorly governed.

    I’m not sure the US and Europe are getting less market oriented. The US for sure, but that may be temporary. My hunch is that southern Europe will need to get more market oriented–fast. And the Nordics are getting more market oriented.

    Lorenzo, In big cities in China the life expectancy already exceeds the US and Denmark. In a few decades the entire country will have a high life expectancy. They are very high savers.

    Rien, Actually, you can tell a lot by visiting a country, if you know what to look at. But I also have done some academic reading on China, so I don’t just rely on impressions.

    I am sympathetic to China, I am not at all sympathetic to the Chinese government, which is still far too communist and authoritarian for my taste. Still it’s light years ahead of 1979.

    I think the people would be quite interested in self government, if given the chance. I’d say the same about Americans, if we were given the chance. The only people in the world who have the right of self governance are the Swiss, and they seem to do a pretty good job.

  10. Gravatar of Alexandre Peña Alexandre Peña
    11. July 2011 at 14:30

    Another question is about demographics and work age.
    China have a high life expectancy, and the old chinese people are very productive. The Americas and Europe not follow this standard.
    My oppinion? China not fail, but US…

  11. Gravatar of onliberty onliberty
    21. July 2011 at 09:53

    China is interesting. The way I see it, their current path is unsustainable. They are obviously a communist country with massive state control over just about everything. However, they didn’t start to grow economically until they implemented market reforms in the 1970s and opened their economy to trade in the 1990s. In other words, they didn’t start to grow until they gave up some of that state power.

    China is trying to have their cake and eat it too. They want to maintain state control and they also want to keep growing. As the citizens of China become richer and more economically free, they will demand political freedom as well.

    So China has three options. First, it can continue the way it’s going by letting the free-market take over more and more and gradually rolling back its state control until it has a “soft” revolution and makes the full transition from authoritarian state to democratic state.

    Second, it won’t want to give up state control but the people will demand it anyway and China will be forced to submit to the will of the people.

    Third, it won’t want to give up state control and will crack down hard on the people and the economy to reclaim its authoritative position.

    I think scenario one would obviously be best followed by two. Three would clearly be the worst. But in any case, China’s “unfair” growth will have to stop.

    If scenarios one or two play out, they will no longer be able to maintain such strict control over their currency. They will have to respond to market forces such as interest rates which will put pressure on unemployment
    – things they don’t concern themselves with now; they’re an authoritarian government so they pretty much control prices and wages. They won’t be able to do that if the people are able to free themselves.

    If scenario three plays out, then China can no longer walk the line of half-in/half-out of the world economy. They will be forced to withdrawal as it will be the only way they can maintain control over their people. If they withdrawal, then they will no longer be an export powerhouse and they will have no reason to manipulate their currency.

    I just don’t see a way that China continues to dominate the way it has.

  12. Gravatar of ssumner ssumner
    22. July 2011 at 12:55

    Alexandre, I don’t think the old Chinese people are very productive at all.

    onliberty, Generalizations are tricky here. “China” doesn’t have any beliefs, and goals, any objectives, because it’s not a person. If you mean the Chinese government (very different from “China”) I’d say the same. It has reformers moving forward, and opponents of change trying to slow it down. In any case, what government officials want right now will have zero bearing on what “China” decides to do 20 years from now–another generation will be in power.

    China has different provinces with vastly different attitudes, policies, and degrees of economic development.

    China has enormous momentum toward more political and economic freedom. That could change, but in the long run I expect it to continue.

    I’m puzzled by your last comment. China doesn’t currently dominate, at least given its population it’s a midget in power terms. If anything, I’d expect it to dominate far more in the future.

  13. Gravatar of onliberty onliberty
    22. July 2011 at 15:36


    Yes, I was imprecise. I agree that there is no “China.” I was speaking of the government in general and the Communist Party in particular.

    As for the last statement, China (ahem, the Chinese *government*)is an exporting juggernaut only because they are manipulating their currency and running their economy on the backs of the people. Regardless of which of the three scenarios plays out, they won’t be able to continue doing that.

    I know you’re busy. No need to respond unless you think I’ve got this all wrong. Thanks.

  14. Gravatar of ssumner ssumner
    23. July 2011 at 08:19

    onliberty. The 1.35 billion people of China export barely more than the 80 million of germany. So it’s certainly no “export powerhouse.” And a low exchange rate doesn’t really have much effect on exports. If that’s all a country had to do, why don’t the other big developing countries also lower their exchange rate, and become “export powerhouses?” India exports about as much as Belgium.

  15. Gravatar of onliberty onliberty
    23. July 2011 at 21:25

    “why don’t the other big developing countries also lower their exchange rate, and become ‘export powerhouses?'”

    That’s a good question. I think they would help themselves if they did (even though I’m firmly against fixed exchange rates). But apparently that’s not how they’re choosing to manage their economy. Most developing nations fix their exchange rate at an appreciated level so as to make imports cheaper. Or they choose to implement an ISI policy instead.

  16. Gravatar of ssumner ssumner
    24. July 2011 at 07:43

    onliberty, You said;

    “That’s a good question. I think they would help themselves if they did”

    Not true. Whenever they try, they fail. They simply generate inflation. There is zero evidence that a low exchange rate boosts economic growth. The most successful growth story in the 20th century was proabably Korea in the 1960s-1980s, and they ran trade deficits most years. How’d they grow so fast?

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