PRC may never match other advanced countries

There was an article in the Wall St Journal last week, by their economics writer Grep Ip, that attracted a reasonable amount of attention.    Ip made the argument, that really should be uncontentious, that on current policies and institutions, the People’s Republic of China is unlikely ever to catch up –  in productivity or per capita income terms –  with the advanced countries, whether in Europe, east Asia, or North America.     The (worth reading) article is behind a paywall, but here is his key chart.

Ip 1

Despite having shot themselves in the foot so badly in the 1950s and 1960s –  such that there were absolutely huge convergence possibilities open to them by the late 1970s – the economic catch-up and convergence of the PRC has been distinctly underwhelming.     And since the economic and political model now being adopted is again increasingly Party/state dominated, the prospects for anything like the sort of productivity growth required to match the advanced economies appear slim.   Absence of the rule of law and of an efficient market-led allocation of resources –  with market disciplines working effectively to correct the inevitable bad calls firms will make –  will do that to your country.    The sheer size of the PRC also makes continued export-led growth harder to sustain, even if the PRC were playing by some genuine approach of free and open trade.

As the article notes, charts like the one above draw on official data, and there are real doubts about whether the official data are accurately representing average PRC incomes (for example, this paper, to which Ip makes reference, suggesting as much as a 25 per cent overstatement).   Credit booms also not infrequently see GDP per capita and productivity measures during the boom rather higher than actually proves to be sustainable.

Ip’s article is consistent with a line I’ve run in several posts over the last few years, noting –  as I put it most recently –  that by all reasonable standards the PRC remains an economic failure.  My most recent post along those lines was late last year.   Here is some of that post:

….the People’s Republic of China (and more specifically, the Chinese Communist Party, that our leaders are so keen to cosy up to) has overseen a really poor economic performance.  It is, more or less, what one might have expected knowing that the rule of law would be absent, markets wouldn’t be allowed to function effectively, state subsidies (of all sorts) would be rampant, and so on.  It could have been worse, of course –  there was the utter chaos, misery, and (for a time) mass starvation from the late 1950s to the mid 1970s.  The handful of other remaining Communist-ruled countries are worse.   But even having stopped doing so much active destruction, the PRC results are unimpressive.  Any other conclusion surely invites that American line about the soft bigotry of low expectations.

Of course, it isn’t the line the PRC would have one believe.  And it suits too many politicians in the West to talk up China as a stunning economic success story.  But it isn’t.  Development economists, left and right, will talk up the hundreds of millions of people who’ve moved above the poverty line.  And that is great, except that (a) it was the CCP that did its utmost (perhaps unintentionally) to put them back below the poverty line in the first place, and (b) getting above the poverty line is a pretty feeble standard against which to judge the economic performance of a country that for centuries matched or exceeded the best material living standards anywhere.

Angus Maddison’s great collection of historical GDP per capita estimates is a typical starting point for such comparisons.    He reports estimates for some countries every few hundred years from year 1 AD, and then more frequent (increasingly annual) estimates for more countries in more recent centuries.  In 1 AD the estimates he reports had Italy with the highest material living standards, followed by Greece.  China was about the level –  or a bit ahead –  of most other places in Europe.   In 1000 AD, China was top of the rankings –  not by much, but it was number 1.  That shouldn’t be any great surprise to anyone who recalls the various Chinese inventions ahead of the discoveries of such things (printing presses, paper money, even very big ships) in the West.   By 1500, China was a bit behind Italy and Belgium, but not much different to most of the rest of western Europe (all well ahead of what is now the United States).

Scholars spill a lot of ink debating why China went into such severe relative decline…..    Whatever the precise mix of explanatory factors that slippage happened.   In 1850, Maddison’s estimates have Chinese GDP per capita at about a quarter of that in the UK and the Netherlands, and less than 40 per cent of his “Western European 12 countries” average.  By 1900, estimated per capita GDP was only about 15 per cent of that in the highest income countries.

But perhaps as importantly, in 1900 China’s GDP per capita is estimated to have been about half that in Japan, and just a bit behind that in Taiwan (by then a Japanese possession).   As late as 1870, China had been not far from the GDP per capita in a range of Asian countries/territories for which Maddison now has estimates –  about on par with Korea, Taiwan, and Thailand, and a bit behind Japan, Hong Kong and Singapore.

And this is what they’d been further reduced to by 1976, the year Mao died.  I’m using the Conference Board’s PPP estimates, and have shown a mix of countries –  mostly east Asian and European, but with a few other interesting cases (eg Israel –  brand new in 1948) thrown in.

china 1

Such utter self-destruction and failure.  It wasn’t done by outsiders.  It wasn’t as if the PRC had faced uniquely bad external threats.  It was like economic suttee, with the depraved indifference of mass starvation thrown into the mix.

And how does the picture look today, with the Conference Board’s 2017 estimates.

china 2

The PRC has rocketed past the Philippines and Sri Lanka, and still trails the rest of this pack rather badly.   And this isn’t Tanzania or Rwanda, but a country that was once –  for centuries –  among the highest living standards anywhere in the world.  A country in a region where South Korea, Japan, Taiwan, and Singapore now manage advanced country living standards –  one of those a country that struggles to get international recognition and under constant threat from the PRC.

From the Maddison estimates, in 1980 the Soviet Union –  a region never at the forefront of material living standards –  had GDP per capita about the same ratio to that in the western European countries that China has today.  In fact, about where China was –  in relative terms –  in 1850 (see above).  It is a simply dismal economic failure in a country –  controlled by a Party –  that would have so much potential were its people ever to be free, to ever be properly governed with the rule of law rather than the rule of Xi.

For the same countries, here are the real GDP per hour worked estimates.

china 3

It really is an astonishingly poor performance.  Or at least it would be unless you’d been told in advance that Japan, Singapore, Taiwan, and South Korea would establish market economies with the rule of law, sound governance etc etc (and none of it perfect) and that the PRC would remain a land where the (Communist) Party actively rules.  Then, the outcomes are probably much as one might expect –  China lags very badly behind, to the disadvantage of its people, even if to the enrichment (power, money) of its rulers.

On the IMF’s full list of countries, the PRC now ranks 79th (out of 187) in the GDP per capita (PPP) stakes.  Average real GDP per capita is a touch behind that in Iraq (yes, I was surprised) and the Dominican Republic, and a little ahead of Brazil and Macedonia.  Perhaps China’s growth rates are faster than those places, at least if one (a) believes the official data for the Xi period, and (b) discounts the massive distortions and misallocations associated with one of the largest credit booms in history.      But there is no sign of Chinese per capita incomes catching those of the leading countries any decade soon (if things unwind nastily, the gaps would even widen a bit for some years).

Taiwan, Korea, Japan, and Singapore are genuine economic success stories –  catch-up and convergence more or less as the textbooks suggested was possible.  Cause for celebration in fact.   The PRC?  Anything but.  Being big doesn’t change that –  even if it gives geopolitical clout to a lagging middle income country –  it just means more people are failed by their rulers (and by those in countries such as ours who give the rulers aid and comfort, pander to them, or simply cower in a corner).

New material again.

As regular readers know, I am a trenchant critic of the failure of successive New Zealand governments to lift our own average productivity performance.  Decade after decade we slip further behind first the leading advanced country group and then, increasingly, most advanced countries.  But bad as our performance has been, on the Conference Board estimates –  which may overstate things quite materially for the PRC (see above) –  average labour productivity in the PRC is about 36 per cent of that in New Zealand (and about 20 per cent of the United States and other leading advanced economies).  In fact, average labour productivity is barely half –  on official figures –  that in Russia.

One other way of looking at these things is to look at where the PRC is now and see how far back one has to go to find when other advanced economies had the same level of productivity.   Compound growth can make quite a difference quite quickly, also a pointer to the economic possibilities for the people of China, were the CCP ever to abandon power and a proper market-led, law-governed, country were to emerge.

For example, on official numbers, the average level of labour productivity in the PRC is now (2018) US$15.3 per hour (converted at PPP exchange rate).    That is probably about where New Zealand –  productivity growth laggard among advanced countries –  was in the early 1950s.    The range of goods and services produced or consumed is, of course, very different from New Zealand in, say, 1952 –  despite its low productivity, PRC consumers still have access to the goods generated at the technological frontiers.

Here is summary table for some of today’s advanced economies, drawn from the Conference Board numbers, with two columns, one using official PRC numbers and one allowing for the possibility, per Ip’s article, that the PRC numbers might be materially overstated.

Ip 2

There is a certain consistency of message: the PRC –  a country heir to a civilisation that was for a long time the most technology-advanced in the world – is perhaps 70 or more years behind: achieving levels of econommywide productivity now that frontier countries were achieving around the time of World War Two.  None of the east Asian countries were doing particularly well at the start of the 20th century, but the PRC is also now 40 or 50 years behind the leading east Asian economies (in South Korea’s case – productivity lower than New Zealand –  “only” 25 years or so).   The PRC is where embattled Taiwan is estimated to have been in 1981.  That isn’t dirt poor, but it isn’t very good either.

But that is what PRC economic failure looks like.     Perhaps they’ll catch-up, but nothing in modern economic history suggests that a statist model like the PRC could make that sort of leap.  Just possibly, in another 20 years the PRC might catch up to where some of the laggard advanced countries are today –  “rich” in some absolute sense –  but by then of course the frontiers will have most likely have moved much further on.

19 thoughts on “PRC may never match other advanced countries

  1. I don’t see how they can catch up Michael. In absolute terms, GDP growth looks set to slow sharply in the next decade as labour and capital deepening stall and TFP growth remains weak. And their political situation – and behaviour towards other advanced countries – suggests that TFP growth will stall.

    Given Xi’s behaviour domestically, the risk is that at some point they turn on each other.

    New Zealand should be working on developing our relations with India. Much better prospects in the next 20-30 years…

    Like

    • You have to be careful of Indian statistics as well. They are still very much a caste system which means there are groups of people who are considered animals that do not factor into the human count.

      Like

  2. It would seem that the high technology solutions such as smart phones, computers etc that drive our various industries and manufactured mainly in China requires a very high labour intensive process. Apple has said very clearly that it can’t manufacture in the US because it needs the tens of thousands of skilled ant like workers. So much for the fear of the coming of AI robots to take over the world.

    After having watched Terminator movies throughout my growing up years, I was indeed initially apprehensive about the future. These days whenever anyone brings up robots crushing humans in wartime I break out laughing. As we all know a single high frequency EMF capable device(or even a solar flare) will not harm any humans or damage any buildings but it will fry any the electronics of any equipment exposed nearby. The fear of AI, Schwarzenegger robots taking over the world with that sort of inherent weaknesses means that it is practically useless in war time pitching humans against robots.

    Like

    • On the other hand a few litres of poison in the water supply kills all the humans. You can repair a robot after a solar flare. You may just need to switch them on and off. That worked in late 1980’s for IBM PCs when PNG electricity company (ELCOM) sent over 500 volts down the mains by accident (not that I’d risk it with a modern PC).

      Like

      • I think they call it test it before you drink it. Sure you may kill a few but these days hospitals are well equipped. Their emergency response crew do react pretty quickly to find antidotes.

        Like

  3. Your message is that China is not successful and the reasons relate to failure of the rule of law and an economy controlled by the government. You have made this point before and the figures you publish prove your case. I must admit to having been surprised how far China is behind the leading nations when first reading your blog about a year ago.

    Your article does make me think. Why no figures for India? I believe they are behind China and the Phillipines but in India the tradition of state rights and decentralised power, rule of law, continuous democracy that is strongly rooted in local and village democracy, entrepreneurial tradition should all have given India an advantage over China unless there are other obstacles to economic success than the ones you list. Is it simple population growth? Is that the factor that holds back India, Phillipines and New Zealand?

    Saying PRC is 40 to 50 years behind leading Asian economies may be misleading. Yes China is now where other economies were in 1970 but how long it takes to close a gap depends on relative compound growth rates not past history. So my spreadsheet has China with a 6% per capita growth rate compared to NZ with a 1% growth rate and it takes 15 years for China to be double other countries with 1% economic growth and 24 years to be triple. So taking your assertion that “” average labour productivity in the PRC is about 36 per cent of that in New Zealand “” in 24 years China will be ahead of us. My granddaughter will be entering the workforce – will she be looking to improve her prospects by moving to China? Of course 6% is not easy to maintain but look how the experts have been wrong about China’s ability to maintain growth in the past.

    There are more important things than economics; see https://www.tvnz.co.nz/one-news/new-zealand/we-can-find-you-kiwi-uyghur-muslim-says-he-received-threats-chinas-police-state

    Like

    • India had a very inward-looking control-oriented economy (the licence Raj) for a long time, hamstringing itself. Things appear to be improving quite materially for India now (similar productivity growth to China in the last decade), altho the estimated level of productivity is only about two thirds that of China (but perhaps with less chance of significant problems with the data, and less more recent distortion thru a credit boom).

      Like

  4. I haven’t read the WSJ article just yet, so maybe the writer there discusses this point, but the pressure China is under is not only to get rich, but to get rich before they get old. And there the clock is ticking quickly – even with the mad one child policy lifted, the social trend is for smaller families . Sex selective abortion compounds the demographic crisis even further.

    From a quick scan of statistics it seems the Chinese median age will intersect with the US fairly soon, if not already, and from there rapidly climb. These issues around ageing are very tricky for even the wealthy countries of the world (say Germany). China is what, a third as rich on a GDP per head basis, as Germany? The wealth gap would need to be closed now, for them to avoid a very hard landing. I cannot imagine they will plug the gaps with migrants – they would need hundreds of millions and no one wants to live there by choice.

    This isn’t to say this does not make them a threat. If anything, it makes things worse. The “social contract” between state and citizen there is roughly, surrender all freedoms and I will make you wealthy. What happens when the people realise that deal cannot be honoured?

    Like

    • I just don’t get this ‘aging issue’. I can understand a health issue with ever increasing costs keeping the feeble and incapacitated alive longer but that is a seperate issue that only correlates with age. Let me try an analogy: in NZ cars last an average of 20 years and obviously those that are old are not as efficient as new ones and they cost more to maintain. Whereas in PNG cars last about 3 years. So PNG has a modern vehicle fleet compared to New Zealand. Seriously no one would argue PNG has an economic advantage. Similarly would China benefit if its demographic crisis was resolved overnight (everyone over 50 drops dead)?
      In the past when NZ was rapidly developing from stone age to No1 economy it needed young energetic people to mine gold, herd sheep and clear forest; now we have a service economy and the age of a Uber driver or a tourist guide or a burger flipper doesn’t influence their performance.
      There are a very small number of important creative tasks where youth is an advantage but even then some artists and scientists maintain their creativity into ripe old age. And there are many more tasks where experience has serious value. Would Michael Reddell’s articles have been better if written when he was 25?

      NZ’s comparative economic failure along with its healthy environment has helped make us world leaders in working past retirement age. What policies should our government be following to optimise an economically productive old age? Can providing access to fitness centres and new cycleways by justified economically? How should superannuation and accommodation benefits be tailored to best effect? I look forward to an article that goes beyond simply demanding ever more Fillipino care-giver immigrants (they have now replaced chefs as our majority immigrant skill category). Note if the author is wrong with the subject of this article and PRC does maintain the growth rate it has experienced for 40 years then when my children retire China will be wealthier than NZ and those foreign care-givers will be heading for Shanghai.

      Like

      • Yes, improving life expectancy and rising median age is a good thing. Where it becomes more problematic if the young-old think they have a right to drop out of the workforce at the taxpayers’ expense. Health is also an issue, but in principle need not be one, provided the overall economy is keeping up.

        Like

      • Bob, I do not think blogging without a revenue stream constitutes a highly productive activity.

        Unfortunately old people are really awful productivity wise. A great example would be say a senior manager like myself. Researching the cheapest hotels on offer(expedia, hotels.com etc) but with minimum room size of 25sqm to stay in Paris and where to stay(learned a new word, Arrondisemant) does take an awful lot of time and effort which equates to zero productivity for the day. So far this is only the accomodation for the first 8 days. There is the rest of the 4 weeks planning over the Xmas and New Year holidays and which part of Europe to holiday in does require even more time and effort to research.

        Part of the reason is one of my eyes is pretty well screwed up due to a partial blindness which is a reminder that life is short which does hamper your focus and concentration on the job. When you are contemplating life is short the incentive and drive to increase productivity is just not there.

        When I was young, 30 years ago, I was working flatout to 3am in the morning on $30k wages each and every day sorting out the needs of 20 project managers running the feasibility numbers of $400 million in projects.

        Like

      • My mother is 87 years of age and is bedridden. Fortunately ACC looks after her needs. Her entire day is looked after by 4 groomers who cleans up after her and gives her a daily bath. She goes for Physiotherapy and has 3 physiotherapists trying to get her body walking capable, twice a week. She used to have only 1 physiotherapist and unfortunately the training centre dropped her which put her progress backwards(thats the problem with trying to be cheap, now they have gone for overkill with 3). She has a driver with a wheelchair motorised lift to transport her to the training center.

        Unfortunately all these jobs have to be done by young people who can carry weight and actually see clearly to drive. I drive but it would be negligent with my partial blindness to be offering Uber driver services when we all know with one eye it affects your depth of vision ie can’t accurately judge distance any longer, even though legally I am allowed to drive.

        Like

      • “”Where it becomes more problematic if the young-old think they have a right to drop out of the workforce at the taxpayers’ expense. Health is also an issue, but in principle need not be one, provided the overall economy is keeping up.””
        It sounds as if you have ideas worth sharing. Interesting question – does receipt of a universal benefit equate to retirement? NZ superannuation is generous by world standards and so are our accommodation allowances where applicable. The admittedly generous superannuation does not allow a pensioner to repair his house, visit friends in other countries or enjoy most of the little luxuries that make life worth living. At present no problem because most retirees own a house and have savings but the next generation will not have made a fortune by accidentally buying real estate.

        Like

  5. Interesting graphs which unsurprisingly confirm democratically governed free market economies do better economically over time than communist style command economies with some free market tweeks.

    I see unstable and choppy waters ahead for the ship PRC. They’ve yet to experience a decent recession. They have told the population constantly the CCP knows what it’s doing and “trust us”. But if that economic tide starts going out there could be all sorts of social upheavel. Life savings lost in stock market crashes, export businesses going under in trade disputes and tarrif barriers, factories closing and unemployment as production moves to cheaper countries. All situations that could create a crisis for the CCP.

    Read any old books about China in the 19th Century and it describes a country in almost constant chaos, riots, instability. Much due to weak government for sure, but the Chinese have always been a volatile people if the CCP fails to deliver the economic prosperity promised, they may see an uprising of the less well off masses. That is probably a constant fear much in the mind of CCP leadership. 20 million protesting on the streets of China may be enough to see regime change.

    Liked by 1 person

    • I look at the same graphs and I am surprised how little democracy helps an economy. I deduce there is a linkage when an economy is under going rapid technological change – a democracy permits old power centres be overwhelmed by new businesses. Democracy is the best system for issues relating to morality and justice but it is wishful thinking to believe democracy is the solution for economies.
      We have to distinguish what is meant by democracy; almost all communist countries had/have parliaments, congresses, etc but if they cannot instigate laws and regulations (ref EU for Brexiteers) then they are meaningless.
      Looking at the interesting graphs I was surprised by the Philliines; a country with the full support of the USA for a century but languishing behind PRC. And South Korea and Taiwan achieved much of their economic growth when they were undemocratic. The spectacular success of Singapore was achieved by a one party state which micro-manages the economy with predominately state owned land and housing which is allocated to deliberately keep it mixed by ethnicity and class. And as mentioned earlier where is India?

      Like

  6. Yes, democracy isn’t the main issue (China wasn’t one when it was technological leader etc). Rule of law and market-driven allocation (and exit) of resources are more important by far. “Culture” broadly defined may matter in some way (see eg Latam failures) but that is the reason I focus on east Asian comparators: if Taiwan and Japan can do it (reach advanced country status) there is no obvious deep cultural obstacle to the PRC doing so.

    Re Taiwan and Korea though, at the point of transition to democracy they were about as poor as the PRC is now.

    Like

  7. The elephant-in-the-room a-child-can-see-it problem is that China is an ethno-nationalist military dictatorship… unlike other ethno-nationalist military dictatorship, the Han Chinese are able to move large voting populations to other countries for lebensraum and expansion of its master race… Nazi Germany on steroids 😉

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s