By Noah Smith
Bloomberg
China is already the world's largest economy by some measures, such as purchasing power parity. It's clear, however, that the country's growth is slowing. Growth dipped from roughly 10 percent to about 8 percent in 2012, and is falling again amid the current slowdown.
When the country recovers from its slump, how much more expansion can we expect before it settles down into a nice, slow, steady pace like every other fast-growing "miracle" country eventually does?
That leaves open the big question of how wealthy China will become relative to developed nations such as Japan, France or the U. S.
These rich nations occupy what economists call the technological frontier. Economies at the frontier have already exhausted all the cheap and easy opportunities for catch-up growth. They can no longer readily absorb foreign technology, or move unproductive farmers into cities, or use high saving rates to accumulate capital (this latter opportunity disappears because maintaining capital becomes more expensive as you get more of it). Their growth rate is essentially limited to the pace at which the human race invents new technologies.
But not all countries at the frontier are equal. Even among rich, slow-growing nations, substantial differences in living standards exist. Japan, South Korea, France, Germany and the U.K., for example, have per capita gross domestic product of only about 75 percent to 85 percent of the U. S. Most economists believe that this gap is caused by differences in institutions, or the broad rules that govern the economy. For example, heavy regulation in Europe or implicit subsidies to unproductive corporations in East Asia, are often cited as holding these economies back from full convergence with the U.S.
So what about China? How good are its institutions? Brad DeLong, economic historian at the University of California-Berkeley, asks this question in a recent article. As is common, DeLong begins by assuming that China's institutions are fundamentally similar to those of the rich countries around it -- Japan, South Korea and Taiwan:
A great deal of China supergrowth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm…by the paranoid Mao Zedong.
But thanks to its communist past and its government's resistance to westernization, China's system of property rights looks nothing like the systems in Japan, South Korea, or Taiwan. It might be that China has invented a totally new system that will do just as well as -- or even better than -- the system that successful countries have been using for centuries now. But that's an outside chance. The safe bet is still that China's strange system will hold it back. DeLong writes:
[China] has had its own system of what we might call industrial neofeudalism...Chinese entrepreneurs have protection via their fealty to connection groups within the party that others do not wish to cross...Such a system should not work...The evanescence of [property rights] should lead [elites] into the same shortsighted rent-extraction logic that we have seen played out over and over again in Eastern Europe, sub-Saharan Africa, Southeast Asia, South Asia and Latin America.
Weighing these factors, DeLong comes to a stark conclusion -- China has only five years of rapid growth left. Since China's per capita GDP is now only about a quarter of the U.S. level, five years of 7 percent growth -- with the U.S. growing at 2 percent -- would leave China at less than a third of America's standard of living by the time it slows down.
More here:
http://www.bloombergview.com/articles/2015-09-04/china-may-never-get-rich?cmpid=yhoo
