Tuesday, October 28, 2014

Economy: China - From Tiger To Snail?

(Drivebycuriosity) - The world economy depends on China`s growth. In the recent years China´s high economic growth rates have been an engine for the global economy. But there is a lot of pessimism now. Many pundits claim that the Asian country will grow much slower in the coming years  (latest number + 7.2%). Recently 2 prestigious Harvard economists published an especially pessimistic  study: Lant Pritchett and Lawrence H. Summers claim that China´s high growth will come soon to an end (nytimes).

Havard´s China pessimists focus on a simple argument: History shows that countries grow on the long run just with an average rate of 2%. High growth rates are just temporary aberrations and are not sustainable, they say. Therefore China´s growth rate will shrink in the coming years to the average rate of 2%.

I believe they are wrong. I will argue with a simple thesis as well: Countries have exceptional high growth rates when they are catching-up to countries which much higher incomes. Today incomes in China are much lower than in the Western world. Therefore the Chinese are working hard and are investing to narrow the gap the wealthy "West". I suppose that this catch-up process will continue and will foster high growth rates in the coming years.

China is following the example of Germany. After World War II the country was poor and incomes were much lower than in the US. The catching-up process lead to high income growth, the so-called "Wirtschaftswunder" (economic miracle), in the 1950s. Other countries like Italy and Japan had similar catch-up processes.

I don´t expect that China will reach the US standard, or come close to it, soon. Neither did Germany, nor Italy and Japan. As the late Prof. Gary Backer described,  all the catch-up processes ebbed away when the income gap got tighter (becker). Indeed Germany reached just 85% of the US income per capita (GDP per capita = gross domestic product divided by midyear population) and Italy`s income per capita ($34,000) is only around 60% of the American level.

According to the World Bank China´s income per capita is around $7,000 (worldbank). In Germany the income per capita is $45,000, and in the USA around $53,000. If China would continue the latest growth rate of around 7% annually their income per capita could reach $27,000 in 20 years (I used the compound interest calculator calculator). If the USA would grow annually 2% over this period - as the Harvard study says - they would attain $78,000. In this case China would have reached just 34% of the US level. The Asian country would still be much poorer than the "West".

If both growth rates (7% and 2%) would run over 30 years, China could reach $53,000 and the US income would grow to $96,000. In this case China would have 60% of the US income, the same percentage as Italy has today (income around $34,000).

But if China would develop as the Harvard study says and would grow just 2% annualy over the next 30 years they would just reach $12,000, which would be only 13% of the US level. If we believe the Harvard pessimists, China will never catch up.

I think this is highly implausible. I see no reason why China should not be able to follow at least the Italian role model and reduce the income gap to 60% of the US level over three decades - which would need an average annual growth rate of 7%. The Asian country is transforming rapidly from an agricultural state into a modern economy, with the help of the Internet and other technologies, and Beijing is implementing reforms to liberalize the economy (driveby).

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