Twofish's Blog

February 27, 2008

When will China overtake the US economically?

Filed under: china, finance, politics — twofish @ 11:14 am

ZII: Ah, all this reminds me of the wonderful days of my youth when the Japanese global takeover was in process. The flavor of the argument is almost exactly the same, and if you squint a little you will find the numbers to be almost the same too. I am not old enough to remember the Soviet and German juggernauts, but I am sure they must have been just as much fun.

But then one can make the opposite mistake. People in 1990 assumed that because the Soviet Union fizzled, China would also. My argument that China has a good three to four decades of economic growth ahead of it is precisely because of looking at why the Soviet Union, Germany, Japan, and the tigers growth.

The Soviet Union grew very rapidly in the 1950’s and 1960’s because they were taking people out of low productivity agriculture and putting them into less low productivity industry. The same is basically true with Germany, Japan, South Korea, Malaysia, Indonesia, Thailand and every other economy that become a developed or semi-developed nation. What happened with the Soviet Union was that they finished industrialization in the mid-1960’s, at which point the fact that they had a horribly inefficient industrial infrastructure killed off growth.

If you take that framework and apply it to China, what you find is that the point at which the China runs into Soviet and Japanese limits is one in which its economy is far larger than that of the United States. China is not even close to the productivity and incomes that the Soviet Union and Japan had when they stalled, and it’s not even close to Thailand or Indonesian levels. The examples of the Soviet Union and Indonesia are important, because it suggests that even if China has a massively inefficient and broken economic system, it still has quite a few decades of economic growth ahead of it, and personally, I think that the big danger over the next few decades is that people take high growth rates as “proof” that an economic system is not broken in a fundamental way.

One other thing, is that in thinking about the Chinese economy, it helps to not think about China as one big economy, but rather as about twenty smaller economies in a free trade zone and currency union. The economy of Zhejiang is radically different from the economy of Gansu, for example, and economically, China resembles the EU more than it does South Korea.

Pettis: I have seen claims by demographers that the UN has systematically underestimated the impact of US immigration, and which project US population to be closer to 500 million. That means that the relevant ratio in the future is not 4.0 to 1 but rather 2.6 to 1 or even 2.2 to one.

The problem with these projections is that they are deterministic whereas what actually happens depends on the political decisions that people make. For example, the amount of immigration that occurs depends very crucially on social attitudes. It’s quite possible that in 2030, China will have a relatively open immigration policy whereas the United States would have a relatively close one. Sure its very hard right now to imagine China having a guest worker program that invites people from Uganda and Angola to immigrate to China and become Chinese, but social attitudes in China-2038 much less China-2058 could be quite different than social attititudes in China-2008. One need only look at different attitudes in Mississippi-1968 and Mississippi-1998. Even in the case of China, the attitudes toward overseas Chinese in 1968 and 1998 are very, very different.

It actually feeds on itself, since countries with high economic growth tend to attract and tolerate economic migrants, whereas people start noticing you are different when economic growth stalls. This is the self-interested reason I’ve always been interested in economics.

The key things about these sorts of projections is not to view them as determinstic projections, but to reverse the problem, and to ask assuming that either China or the United States wants to continue to grow in the 21st century, what has to be done? You look at the key factors that could cause growth to stall, and fix them before they become a problem.


1 Comment »

  1. .
    Very interesting, good luck. But if it was much fairer capitalism like in the US, there would be much less poverty in China, there is way too much corruption., and not enough freedom. Only when those reforms happen will China’s economy be bigger than the America’s.

    absurd thought –
    God of the Universe says
    LOVE communism

    the only right you have
    be part of the collective

    absurd thought –
    God of the Universe says
    HATE capitalism

    and the pursuit of profits
    ignore supply and demand


    Comment by USpace — March 1, 2008 @ 6:03 am

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