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.
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.
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.
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.
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.
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.