Paragraph of the Year
From Reihan Salam:
To really learn from the Chinese, and to enjoy such staggering growth rates, we should go about things differently: let’s have a Maoist insurrection followed by a civil war that lasts for several years. Then let’s destroy most of the wealth in the country, and drive out millions of our most enterprising and educated citizens by launching systematic terror campaigns during which millions of others will die in violence or of starvation. Next, let’s have a modest economic opening in coastal regions: impoverished citizens will be allowed to launch small-scale township and village enterprises and components will be assembled in a handful of cities by our stunted descendants. Then let’s severely curb those township and village enterprises because they represent a potential political threat and invite large foreign multinationals and state-owned enterprises [let’s not forget those!] to work our population to the bone at artificially suppressed wage rates, threatening those who complain with serious reprisals up to and including death. Let us also initiate a population control policy designed to improve our dependency ratio for a few decades. As large numbers of workers shift from low-value agricultural work to manufacturing, we will experience … rapid growth! Mind you, getting from here to there will involve destroying an enormous swathe of our present-day GDP. And that sectoral shift from rural to urban work will run out of gas pretty fast, as will the population control policy that will guarantee rapid aging.
There’s nothing I find more annoying than people who talk about how we need to learn from China’s “success.” I’m all for learning from other countries, but can we please focus on actual success stories (Denmark, Switzerland, Singapore) and not a country that is much poorer than Mexico.
HT: Adam Ozimek
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2. December 2011 at 21:23
I haven’t seen a breakdown of Chinese RGDP growth recently, but I suspect it’s a lot like the Tigers in the ’90s: lots of K and L, not a whole lot of TFP. And we know that growth via factor intensity has pretty much run its course in the West.
In short: I agree with everything in this post.
On a more substantive note: in many ways, marveling about Chinese growth commits the classic error of confusing rates with levels.
I feel like this happens often. Perhaps our introductory economics courses should be more careful about distinguishing rates vs levels?
2. December 2011 at 21:25
The only lesson from China is LISTEN TO MUNDELL.
2. December 2011 at 21:26
Great post. I’ve been trying to tell my Dad for the past two or three months that his FEAR of China is misplaced and this is one more article to help try to convince him.
2. December 2011 at 22:25
but can we please focus on actual success stories (Denmark, Switzerland, Singapore) Not Australia, *sob*, we’re always getting overlooked …
Otherwise, I agree entirely 🙂
3. December 2011 at 01:23
I guess the big reason why rates are given importance when compared to levels is because of yield being higher in high growth areas.
3. December 2011 at 04:42
I agree that levels need more attention, and not just for international comparisons. For a blow by blow analysis of a developed economy, like the U.S., looking at growth rates _usually_ are bettter. The interesting stuff is all growing–other than the interest rate and the unemployment rate.
While I used to favor a price level target rather than an inflation target, and switched to a NGDP growth path target years ago, I usually didn’t worry much about levels. The growth rates are in equilibrium, unemployment is OK, things are fine.
Now we have a situation where the level of nominal GDP is way off, and the level of real GDP looks way off. The growth of the two isn’t that bad. The growth of employment is not good, but it is growing. But that completely misses the problem that the level of employment looks way off. Of course, the level of unemployment is way off too. The price level is a bit off, and inflation is a bit low, but nothing like deviation of the other levels.
Sometimes I think that even decent economists refuse to see the problem because the growth rate of expenditure, inflation, and the growth rate of real output look pretty much OK. That is, they just overlook the unemployment rate and don’t look at the other levels.
You know, the natural rate of unemployment in France was about where ours is now. It can happen.
3. December 2011 at 05:07
@ Bill
Coincidently, I just did a post that emphasizes the “forgotten levels”:
http://thefaintofheart.wordpress.com/2011/12/03/the-hole-theory-of-employment/
3. December 2011 at 05:09
I haven’t seen a breakdown of Chinese RGDP growth recently, but I suspect it’s a lot like the Tigers in the ’90s: lots of K and L, not a whole lot of TFP. And we know that growth via factor intensity has pretty much run its course in the West.
Nope, China’s a TFP monster. Good news all round.
3. December 2011 at 06:23
Integral, I agree about TFP, indeed I’m sure it’s even worse than the more efficient Tigers like Hong Kong.
BTW, I still think Krugman made a bit too much of the TFP issue, although perhaps some people thought there really was an East Asian “miracle.”
It was never fair to compare places like Singapore to the Soviet Union, Singapore’s development is much more impressive, much more sustainable, than the Soviets ever were. I know this is off topic, but I was reminded of the Krugman arguments by your comment. Although he was technically correct, it cast the achievements of the 4 Tigers in an excessively negative light, in my view.
Morgan, And people think I’m obsessed with money! China would be growing fast with either fixed or flexible rates.
Thanks John, And by the way, I’m sometimes considered an China optimist, because I think the growth will continue for quite some time. But then it will eventually level off below US per capita levels as Japan has, in my view. My optimistic forecast is based on the assumption that market reforms will continue to occur.
Lorenzo, I was actually thinking of including Australia, and have mentioned it elsewhere. But I anticipated complaints that it got a lucky break from commodity prices. I don’t agree with that view, but didn’t want to argue the point.
Prakash, Good point, a finance view of the world.
Bill and Marcus, Good point, the levels are very important. BTW, that’s the flaw in The Economist’s recent article that things aren’t so bad in Japan. After a horrible 1990s their per capita income has been growing at roughly US rates. But the problem is that a country with people as highly productive as the Japanese should grow a bit faster, as long as their incomes (PPP) are only 70% of US levels.
Left Outside, That’s good to know. It may reflect their low level of development, and also the move away from a hugely inefficient communist system. Productivity back in the 1980s was abysmally low in the huge state-owned factories, often over-staffed by an order of magnitude.
3. December 2011 at 07:04
Here’s a little tidbit. To validate comparing the Chinese growth rate with US or (Western) European growth rates, per-capita incomes would have to be about the same.
There are about 4 times as many Chinese as there are Americans. A world in which we could carelessly compare Chinese to American growth rates would look very different: China alone would be as productive as the entire world is now.
3. December 2011 at 07:26
Neal, Very interesting observation.
3. December 2011 at 09:49
@Left Outside,
Interesting! I stand corrected.
3. December 2011 at 10:13
Let’s learn from Denmark, Singapore, Switzerland… Let’s start by fragmenting the United States into ~ 100 city state units with vastly different policies, secure borders, independent currencies, etc.
3. December 2011 at 11:23
‘You know, the natural rate of unemployment in France was about where ours is now. It can happen.’
Very good point, Bill. All it takes is an unrealistic electorate, continually falling for promises that can’t be kept.
3. December 2011 at 11:30
Statsguy, Interesting comment. Could be read three ways:
1. Mocking those who think a vastly different society like China has anything to offer the US.
2. Sarcastic, criticism of my post.
3. Sincere, which is how I prefer to read your comment. Here I recommended breaking the US up into 50 different countries, each averaging a bit over six million people (similar to the three countries I cited.)
http://www.themoneyillusion.com/?p=1980
Patrick, I made that point once in a post. It’s possible we end up like France, although I still think the odds are that we recover at some point.
3. December 2011 at 15:49
Scott; fair enough I guess. You know what they say about Australians: we are a very balanced people, we have chips on both shoulders 🙂
Australia went through a period where every business cycle generated a high level of unemployment than the previous. Now, it is around 5%: one can shift back downwards, but it takes a mixture of reform and sustained growth.
Of course, the country really overlooked was the one which has had the greatest rate of per capita GDP growth since 1960: but who remembers Botswana?
My favourite comment about China is that if 1.3bn Chinese cannot produce more than 300m Americans, they have to be doing something seriously wrong. (Alas, I cannot know remember where I read it.) That they are not making those levels of mistakes is good, but hardly makes them a model for anything other try and not make such mistakes.
3. December 2011 at 16:35
Regarding the paragraph of the year, it is worth pointing out that in a very different context the then developed world did something similar in the 30’s and 40’s.
We mindlessly decimated our economies with lousy monetary policy, as well as lousy fiscal, regulatory, trade and non-immigration policies.
We then, via WWII, engaged in a horrific destruction of both physical and human capital on a mind-blowing scale.
We then had a massive economic recovery in the 50’s and 60’s, during which time the then youthful generation came to assume that that boom (caused by the recovery from massive economic destruction) where anyone with both a strong back and an uneducated brain could earn big bucks was the normal state of affairs.
We then had a reversion to something sustainable, during which time the rent captured by people with both strong backs and uneducated brains famously engaged in something that might be called “The Great Stagnation”, resulting in much hand wringing and a resurgence of some stupid economic policies partially as a result.
China’s economic growth will inevitably slow once its “copycat economy” experiences decreasing returns.
However I think it is a mistake to assume that the entrepreneurial and education “obsessed” (for lack of a better word) Chinese won’t transition nicely into an innovation economy, noting in passing that an innovation economy inevitably grows slower than a copycat economy. I foresee a strong possibility that China will overtake the US in per capita income in about a century or so, even if the US doesn’t accelerate that passing of the baton by self-destructing….
3. December 2011 at 18:36
Scott,
Re: Japan – The Economist argument is that GDP is shrinking but per capita GDP is growing because of a declining population. I.e. the economic problem is being caused by demographics.
They got the correlation right, but but not the causation.
3. December 2011 at 19:03
Lorenzo, Yes, but at least China’s starting to correct mistakes from the past. The are “less bad” at making stuff than 30 years ago.
happyjuggler, I actually doubt they’ll overtake us in 100 years, but not because I have a high opinion of the US. Rather I find US output puzzlingly high. I really can’t understand why countries like Switzerland, (or any other developed country save oil-rich Norway) has yet to overcome us. Put it this way. Before China can overcome the US the 1.4 billion Chinese must overcome the Swiss in income per capita. That’ll take a while. I’ll think they’ll get slightly richer than japan, then level off.
dtoh, Yes, and I still think they are confusing levels with growth rates. It’s the level of income that’s the problem in Japan. It’s barely above Italy.
4. December 2011 at 12:53
There’s nothing I find more annoying than people who talk about how we need to learn from China’s “success.”
Me too. It is amazing how people will say that. I have herd people say that about green energy!
4. December 2011 at 21:44
Unfortunately, some people may think that all sounds pretty good.
4. December 2011 at 22:17
Yeah, we should follow Australia’s success, invade a country with a huge amount of resources, then profit. What a stupid comment, and this if from a fellow Aussie.
Still, this article focuses on the negative, whereas people wanting to emulate China will focus on the things China does right. Of course, a lot of those things are lower wages and less regulations, which makes life pretty shitty over there.
5. December 2011 at 07:33
There is a speech from Richard Wilkinson is relevant to this post, and also your previous post musing about moralizing cultures and money:
http://www.ted.com/talks/richard_wilkinson.html
PUNCHLINE:
The “success stories” are correlated with cultures that have less income inequality.
The speaker finds that per capita income does not correlate with social and cultural health measures. But those cultural health measure DO seem to correlate with income inequality, with the greater inequality the worse those nations do on the measures (violent crime, literacy, obesity, infant mortality, imprisonment, teenage birthrates, & more). I would check it out if you can, see what you think.
The speaker does make a point that very different political/economic environments achieve the superior outcome. Denmark and Sweden have very high tax rates and seem to use taxes/subsidies to achieve a more equal income distribution. However, Switzerland and Japan are both lower-tax nations but still have more equal income distribution, and rank highly on the social/culture health measures. So there are many ways to get there – but “success” seems well-correlated with a more egalitarian income distribution.
5. December 2011 at 08:06
Jason
Please take a look at this:
http://super-economy.blogspot.com/2010/02/spirit-level-is-junk-science.html
http://super-economy.blogspot.com/2010/02/spirit-level-is-junk-science-part-deux.html
5. December 2011 at 12:03
@Contemplationist I will check those out
7. December 2011 at 22:52
cak: your comment seems to fall into the “not even wrong” category. Lots of places with resources have been invaded over the last few centuries, with highly variable outcomes. Also, I was mainly talking of the last few decades: something Scott clearly understood since that is also the context of China’s success. Australia’s comparative economic performance 1913-1983 was decently mediocre.
As for China, I am not sure rampant corruption quite counts as a lack of regulation: that you can buy your way out of regulation may make it “efficient” in a sense, but not a good one. The Chinese government did stop “making the Chinese lazy”, a shift to be encouraged to be sure.
10. December 2011 at 07:23
cak, The basic problem in China is not a lack of regulations. It’s communist era regulations that make China poor. Hong Kong is far less regulated in an economic sense. (Of course it has more environmental/safety regs, but that is a different issue–there I agree with you.)
Jason, That makes sense. Just thinking out loud, suppose culture has something to do with economic success. Then culturally homogeneous countries might be expected to have a more equal distribution of income. The most successful countries would then be those with almost everyone belonging to the “good” culture. Of course I mean “good” in a productivity sense, I don’t believe cultures are better or worse in any overall sense.