The problem with this sort of economic growth is that it yields diminishing returns. You can only build so many roads and factories and educate so many people before you run out of room for improvement. Obviously, given the vastness of China's population and the significant portion of the population, there's still a lot of room for development, but that doesn't necessarily equal the largest GDP in the world. Krugman's argument that growth is not being achieved by increased output per unit of input, or increased efficiency, seems a likely limitation on Chinese growth. What evidence is there that the Chinese economy is built around something more significant than cheap manufacturing? Krugman notes that domestics savings, a driver in economic growth, cannot increase indefinitely, and other research suggests that Chinese domestic savings are very likely to plateau, if not be replaced by increased consumption. Similarly, China is likely to face a demographic crisis as a result of its single child policy, which led to an aging population as well as a disproportionately male population. Moreover, authoritarianism limits innovation, which necessarily decreases the likelihood of increased efficiency.
That's just considering limitations within China. The Chinese economy does not exist within a vacuum. It's economic fortunes are related to and dependent upon the actions of other countries. Clyde Prestowitz hints that with regards to US trade policy, diplomatic considerations often trump economic considerations, which explains the amount of business that we do with Asian nations who devalue the currency, violate copyright laws, and are generally protectionist, all without putting up much protest. It is doubtful, however, that India will be as tolerant. Similarly, Brazil is feeling the crunch of domestic manufacturing being undercut by Chinese manufacturing (which is notably a practice in which the successful Asian economies did not engage). Panic about Chinese power is circulating in Western policy circles as well.
Ultimately, it seems to me that our fear of a Chinese juggernaut is the product of our own insecurities. We are watching China grow while we slip from an unsustainable position of absolute global supremacy, and it scares us. The existence of other significant powers in the world does not, however, totally negate our own power.
I agree that a more moderate discussion on China’s rise in the United States is necessary. I also agree that far from being an unstoppable all-consuming juggernaut, China remains a very poor country with a long way to go in terms of development. Krugman and Drezner make valid points on the central role that the unprecedented mobilization of inputs has had on China’s rapid growth, as well as the inevitable diminishing returns that will result from this strategy – coupled with the country’s unsustainably high levels of savings.
ReplyDeleteThis being said, I think China’s rapid growth goes beyond the sheer mobilization of inputs, as Chinese productivity has risen largely in tandem with overall growth - to the tune of 10 percent per annum since the 1990s. The country has gone from exporting mainly footwear and clothing in the 1990s to computers, computer parts, automobiles, machinery, and telecommunication equipment today. Meanwhile Chinese firms are being pushed by the rigors of the market and a prudent government industrial policy, with incentives within the country increasingly being skewed towards businesses utilizing productivity enhancing factors of production. Moreover manufacturing wages have more than doubled in the last decade, while the service sector continues to expand rapidly. Yes there are some major issues that need to be addressed in terms of rebalancing the economy from a high-savings export-orientation, to the creation of a robust domestic market, with higher levels of consumption. But I would be shocked if the transition were to fail, especially considering the remarkable competence of Chinese economic and monetary policy makers in recent years.
China is unlikely to seat the US as the world’s largest economy for at least two decades, and even after that will likely take the better part of the century to catch up to US levels of per capita income and productivity – if it ever does. Still the country will undoubtedly emerge as the single most important market of the 21st century, effectively ending over 130 years of US leadership, regardless of the naysayers’ nitpicking.
Fair enough. I'd say there's probably something to the argument that increased per capita income is going to lead to an increased call for democratic reforms, which will likely derail China's economic policy to a certain extent. I think there's also something to be said for the role that competition with India and Brazil will play in the future as well. Assuming that the Eurozone deals with its problems effectively and US economic policy corrects itself with sensible regulation, increased R&D spending, and increased spending on education (obviously these are substantial assumptions) I see an end to the absolute dominance of the United States over the rest of world, but not necessarily us slipping into second place. If you throw the scarcity of fossil fuels, scarcity of water, and the impending demographic crisis China faces in there somewhere, they seem less intimidating. China is clearly going to play a significant role in global affairs in the future; I just have a suspicion that their growth is unsustainable.
ReplyDeleteYes, I think that's a reasonable prediction. No one can predict the future with any degree of accuracy, and there are indeed reasonable questions regarding the sustainability of China's current rise.
ReplyDeleteSustainability aside, the recent recession has brought out the doom-and gloom commentators that grossly underestimate American political and economic power. Even when China becomes the largest economy in the world (PPP likely within the next decade, in nominal terms within two decades), the country will still be significantly behind the US in terms of productivity, per-capita R&D, corporate earnings and per-capita income levels. We are entering a world of multipolarity in terms of economic and political power - the US will remain arguably the leading actor in international affairs, with increased competition from other actors.
Further, it seems to me that political liberalization is inevitable in China, and political changes will have a significant impact on the ability of the government to enact economic policy. This being said, government regulatory and monetary policy are unlikely to shift too dramatically (whereas things like infrastructure construction, entitlement spending will), so while political liberalization could shift some policy decisions, the general trajectory of China's economic ascent is unlikely to change too much.
The general trend often seen in economic history is that once you unleash the forces of market capitalism, they are hard to suppress. Patterns of rapid development have been seen in Europe (starting with Germany, followed by Italy, Spain and Russia) and in East Asia (Japan, South Korea, Taiwan, Singapore, Malaysia), with the end result in all cases being modernization. I doubt China will be much different.