China is not going to be a miracle

By Jonathan Power

The Nobel-prize winning economist, Robert Fogel, believes that China will grow at an average rate of 8% until 2040, by which time it will be twice as rich as Europe in per capita terms. His model is based partly on so-called geometric growth. An example: If my ancestors had invested a penny in 1800 at a compound interest rate of 6% a year above inflation it would now be worth $280,000.

Sounds good, but it isn’t. The chances of this happening are nil. Indeed I would go as far as to say that China remains a classic case of hope over experience, reminiscent of de Gaulle’s famous comment about Brazil: ”It has a great potential and always will”.

In the 1970s it was Brazil, with its annual 10% growth that was going to become the superstar of the decade – and perhaps for ever more. In the 1980s the talk was of Japan. In the 1990s both countries came unstuck – Brazil, after decades of being the century’s fastest growing economy (along with Taiwan), because it over-spent and over-borrowed and in its massive state and social sectors chronically underperformed; Japan because its quasi-feudal company and ministerial structures protected the dross as well as the gold in a system that could never bring itself to embrace full meritocracy.

This is not to belittle China’s achievements of the last 30 years. It has grown exceptionally fast and has lifted half its population out of poverty. But as a British Chancellor of the Exchequer once commented, ‘Beware of extrapolation, it can make you blind’.

The fact is as countries grow growth gets harder – hence the developed countries growing even in good times at never more than 4% and more commonly at 2-3%.

Japan caught up with the West in the 1980s but since 1990 its economy has grown at an average of 1%. It took South Korea 30 years, from 1960 to 1990, to raise its GNP per capita from one thirtieth of the US to one third, but then it took another 20 years to reach one half. South Korea for all its Samsungs and Hyundais is still a long way from catching up with the US, even though it is likely to continue to grow steadily.

China has experienced three ‘bonuses’ in recent times.

The first are the fruits of its one-child policy that prohibits parents from having more than a single child. In the short run this helped bring large productive gains to the economy as both parents and state could focus on maximising the potential of these children. It also reduced the population growth rate dramatically. But, as the middle class grows bigger and the Chinese are given more social freedoms (not political ones) they are going to push the government to change the one-child policy.

The second is the movement of hundreds of millions of women from being housewives or helping with the family farm to the cities and work.

Neither of these two epochal events are repeatable. They have made their one time contribution to boosting output.

The third bonus is urbanization. Urban populations are usually more productive than rural ones. The rapid movement from countryside to city has played a large role in present day growth but already shortages of labour are appearing in some cities and wages are being pushed up as the inward flow slows. Today there are far less men- and women- migrating.

China now is entering a stage of development where service industries are growing and traditional industrial, mining and agriculture are diminishing relatively. Newer service industries are not so productive and at this stage in development all economies start to slow down in their rate of growth. Moreover, in the expanding number of hospitals and schools- good indicators of development- increasing productivity is hard.

The Chinese have also had enough of pollution from traditional industries. The terrible smogs in Beijing earlier this year which just about brought the city to a standstill got the message through to those at the top of the Communist Party who also had to breathe in the air which kills, according to the World Health Organisation, 650 million people a year.

To remedy this will cost billions of dollars and take a decade. Only slowing growth will make the task of controlling pollution a shorter and cheaper process.

Last but not least is the stifling grip of the Communist Party with its refusal to countenance democracy. If anything the leadership is digging its heels in. Imagination and creativity are not at their best when people cannot write what they want or speak out publicly. There is no country in the world that has a large service industry, a dynamic knowledge economy and no democracy.

China, I think, is not a miracle about to be performed.

Copyright: Jonathan Power

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