September 22, 2003

The Asian Century

Martin Wolf looks forward to the Asian Century:

FT.com Home US: Asia's rise is the economic event of our age. Should it proceed as it has over the last few decades, it will bring the two centuries of global domination by Europe and, subsequently, its giant North American offshoot to an end. Japan was but the harbinger of an Asian future. The country has proved too small and inward-looking to transform the world. What follows it - China, above all - will prove neither...

Posted by DeLong at September 22, 2003 09:09 AM | TrackBack

Comments

Umm, but weren't we already supposed to be rulled by everything Japan by now? Extrapolating the growth rate of the Tigers into the future is like saying the Soviet Union was an economic powerhouse because of its growth rates in the 1930s. Isn't it a stylized fact by now that when a country crosses into first world status (whatever that maybe)growth slows down to match other first world countries?

Posted by: Rob on September 22, 2003 10:07 AM

March 1, 2003

Does Democracy Avert Famine?
By MICHAEL MASSING

Few scholars have left more of a mark on the field of development economics than Amartya Sen.

The winner of the 1998 Nobel Memorial Prize in Economic Science, Mr. Sen has changed the way economists think about such issues as collective decision-making, welfare economics and measuring poverty. He has pioneered the use of economic tools to highlight gender inequality, and he helped the United Nations devise its Human Development Index -- today the most widely used measure of how well nations meet basic social needs.

More than anything, though, Mr. Sen is known for his work on famine. Just as Adam Smith is associated with the phrase "invisible hand" and Joseph Schumpeter with "creative destruction," Mr. Sen is famous for his assertion that famines do not occur in democracies. "No famine has ever taken place in the history of the world in a functioning democracy," he wrote in "Democracy as Freedom" (Anchor, 1999). This, he explained, is because democratic governments "have to win elections and face public criticism, and have strong incentive to undertake measures to avert famines and other catastrophes." This proposition, advanced in a host of books and articles, has shaped the thinking of a generation of policy makers, scholars and relief workers who deal with famine.

Now, however, in India, the main focus of Mr. Sen's research, there are growing reports of starvation. In drought-ravaged states like Rajasthan in the west and Orissa in the east, many families have been reduced to eating bark and grass to stay alive. Already thousands may have died. This is occurring against a backdrop of endemic hunger and malnutrition. About 350 million of India's one billion people go to bed hungry every night, and half of all Indian children are malnourished. Meanwhile, the country is awash in grain, with the government sitting on a surplus of more than 50 million tons. Such want amid such plenty has generated public protests, critical editorials and an appeal to India's Supreme Court to force the government to use its surpluses to feed the hungry.

All of which has raised new questions about Mr. Sen's famous thesis....

Posted by: anne on September 22, 2003 10:11 AM

Sorry - I somehow posted in the wrong space. I have no idea how. This should have gone in India debate....

Posted by: anne on September 22, 2003 10:40 AM

All the world needed: the world's Next Great Transformation Engine turns out to be one of its most repressive communist regimes. This is going to be one fun century!

Posted by: Emma on September 22, 2003 11:22 AM

I buy it, and I bet a lot of Singaporeans, Japanese, Koreans, and Chinese do, too, when they see a United States that can't produce fully literate college graduates.

Posted by: Jim Harris on September 22, 2003 01:22 PM

"Should it proceed as it has over the last few decades, it will bring the two centuries of global domination by Europe and, subsequently, its giant North American offshoot to an end. "

Well, one must refer to some sort of time scale. If we leave the prediction open ended, sure, anything can happen in 150 years. But as to the forseeable future, claims about things like China challenging the US as a power are often grossly exaggerated.

It's interesting that even if one grants the common but very dubious claims about China's annual GDP growth being something like 7%, in absolute terms US per capita GDP is still pulling up and away from China's -- the income gap is still widening in Americans' favor -- because the US growth rate is compounding from a much larger number. And America will continue to pull away from China in this manner for some time.

Posted by: Jim Glass on September 22, 2003 02:20 PM

"I buy it, and I bet a lot of Singaporeans, Japanese, Koreans, and Chinese do, too, when they see a United States that can't produce fully literate college graduates."

Which is why they send so many of their children to study in our colleges.

The fact that so many of them do come here is another sign that Asia's rise is more likely to be the story or our children's or grandchildren's age rather than ours. And that Asia's century will be the 22nd rather than the 21st -- or at least not start until the last half of the 21st.

People who correctly see real revolutions coming often are premature with their arrival predictions.

Posted by: Jim Glass on September 22, 2003 04:20 PM

Anne, I do not know where you got your numbers. Check this article out. This is from www.swaminomics.com.

How hungry are Indians?
The Times of India, June 1, 2003

The monsoon is about to arrive, and people are anxiously scanning the skies. Two of the last three years have seen poor rains, and the drought last year was the worst for decades. How bad is the hunger caused by such deprivation?

Roughly a quarter of the population remains below the poverty line. Readers may conclude that a quarter of the population goes hungry. Not so. Indeed, hunger is remarkably low in India. Only 3 per cent of people say that they do not get enough to eat every day of the year.

You might think this is an achievement worth boasting about. However, few economists mention the data on hunger. Those who have made a living by claiming that poverty is high are most likely to keep silent on this. But surely we need to talk about an important issue where much progress has been made.

The National Sample Survey Organisation conducts surveys every five or six years to measure poverty in the country. One of the questions asked is whether people get enough food every day of the year. If not, do they get insufficient food in some months of the year, or in every month?

The accompanying table shows the facts. In the 1983 survey, 81.1 per cent of people said they were never hungry. So, barely 19 per cent were ever hungry during the year — less than half the proportion recorded as being under the poverty line. Government economists were embarrassed by this divergence between the poverty ratio and hunger ratio: they had long claimed that the poverty line had been calculated on the basis of adequate nutrition, and the claim now looked absurd.

Their reaction? Why, to drop the embarrassing question on hunger altogether for the next survey in 1987-88! You do not have to explain data that are not collected! However, other economists expressed outrage at this, so the question was restored in the 1993-94 and 1999-00 surveys.

These show an ever-growing divergence between the poverty and hunger ratios. Poverty has fallen, but hunger has fallen much faster. The proportion of rural Indians saying they are never hungry rose to 94.5 per cent in 1993-94, and to 96.2 per cent in 1999-00. The urban proportion was 98.1 and 98.6 per cent respectively. The chronically hungry (who experienced hunger in every month of the year) shrank from 2.4 in 1983-84 to 0.7 per cent in 1999-00 in rural areas, and from 0.8 to 0.3 per cent in urban areas.

Many readers will be amazed. Why, they will ask, does the media never highlight these data? Well, let me plead guilty along with the others: we have all focused on the poverty figures and ignored the hunger data. I now seek to rectify this omission.

Some people may doubt the accuracy of the data. My friend P. Sainath once told me that it hurts the pride of people to say they are hungry, and so they claim to have full bellies even when they are hungry. I wondered, is this so? Or is it a lame rationalisation of those who have been exposed as exaggerating hunger? If the surveyed people do not lose pride in claiming to be poor, why should they lose pride in claiming to be hungry?

I checked this out with a nephew working for an NGO in the villages of Rajasthan. I asked, will people truthfully tell surveyors whether they are hungry? My nephew thought a minute before replying. If the question is asked by people within a village, villagers may overstate their living standards to keep up appearances with neighbours. But if somebody from outside asks the question, villagers will tend to understate their living standards and claim great distress, since they know it might get some compensation or benefit.

That sounds a fair assessment to me. I believe the hunger data do not understate the truth, and may overstate it. Only around 3 per cent of Indians suffer from hunger.

Impossible, some readers will say. The TV news last year was full of people who were not only hungry but sometimes starved to death. Very true. But remember that 3 per cent of India’s population means 30 million people. That is a huge number in absolute terms, and explains why the media can find them quite easily in distressed areas.

Clearly a hunger ratio of even 3 per cent is too high for a country of our size. We need to bring it down to zero. But let us boast a little about the fact that we have reduced the ratio from 19 per cent to 3 per cent. It is an achievement of some note.

Posted by: tsquared on September 22, 2003 06:49 PM

Anne, I do not know where you got your numbers. Check this article out. This is from www.swaminomics.com.

How hungry are Indians?
The Times of India, June 1, 2003

The monsoon is about to arrive, and people are anxiously scanning the skies. Two of the last three years have seen poor rains, and the drought last year was the worst for decades. How bad is the hunger caused by such deprivation?

Roughly a quarter of the population remains below the poverty line. Readers may conclude that a quarter of the population goes hungry. Not so. Indeed, hunger is remarkably low in India. Only 3 per cent of people say that they do not get enough to eat every day of the year.

You might think this is an achievement worth boasting about. However, few economists mention the data on hunger. Those who have made a living by claiming that poverty is high are most likely to keep silent on this. But surely we need to talk about an important issue where much progress has been made.

The National Sample Survey Organisation conducts surveys every five or six years to measure poverty in the country. One of the questions asked is whether people get enough food every day of the year. If not, do they get insufficient food in some months of the year, or in every month?

The accompanying table shows the facts. In the 1983 survey, 81.1 per cent of people said they were never hungry. So, barely 19 per cent were ever hungry during the year — less than half the proportion recorded as being under the poverty line. Government economists were embarrassed by this divergence between the poverty ratio and hunger ratio: they had long claimed that the poverty line had been calculated on the basis of adequate nutrition, and the claim now looked absurd.

Their reaction? Why, to drop the embarrassing question on hunger altogether for the next survey in 1987-88! You do not have to explain data that are not collected! However, other economists expressed outrage at this, so the question was restored in the 1993-94 and 1999-00 surveys.

These show an ever-growing divergence between the poverty and hunger ratios. Poverty has fallen, but hunger has fallen much faster. The proportion of rural Indians saying they are never hungry rose to 94.5 per cent in 1993-94, and to 96.2 per cent in 1999-00. The urban proportion was 98.1 and 98.6 per cent respectively. The chronically hungry (who experienced hunger in every month of the year) shrank from 2.4 in 1983-84 to 0.7 per cent in 1999-00 in rural areas, and from 0.8 to 0.3 per cent in urban areas.

Many readers will be amazed. Why, they will ask, does the media never highlight these data? Well, let me plead guilty along with the others: we have all focused on the poverty figures and ignored the hunger data. I now seek to rectify this omission.

Some people may doubt the accuracy of the data. My friend P. Sainath once told me that it hurts the pride of people to say they are hungry, and so they claim to have full bellies even when they are hungry. I wondered, is this so? Or is it a lame rationalisation of those who have been exposed as exaggerating hunger? If the surveyed people do not lose pride in claiming to be poor, why should they lose pride in claiming to be hungry?

I checked this out with a nephew working for an NGO in the villages of Rajasthan. I asked, will people truthfully tell surveyors whether they are hungry? My nephew thought a minute before replying. If the question is asked by people within a village, villagers may overstate their living standards to keep up appearances with neighbours. But if somebody from outside asks the question, villagers will tend to understate their living standards and claim great distress, since they know it might get some compensation or benefit.

That sounds a fair assessment to me. I believe the hunger data do not understate the truth, and may overstate it. Only around 3 per cent of Indians suffer from hunger.

Impossible, some readers will say. The TV news last year was full of people who were not only hungry but sometimes starved to death. Very true. But remember that 3 per cent of India’s population means 30 million people. That is a huge number in absolute terms, and explains why the media can find them quite easily in distressed areas.

Clearly a hunger ratio of even 3 per cent is too high for a country of our size. We need to bring it down to zero. But let us boast a little about the fact that we have reduced the ratio from 19 per cent to 3 per cent. It is an achievement of some note.

Posted by: tsquared on September 22, 2003 06:51 PM

the above is from www.swaminomics.org and not.com

Posted by: tsquared on September 22, 2003 06:54 PM

the above is from www.swaminomics.org and not.com

Posted by: tsquared on September 22, 2003 06:55 PM

INTRODUCTORY COMMENT

There seem to be two issues raised by the Martin Wolf argument . . . to the extent anyway that Brad DeLong’s brief summary of it can be grasped: The Financial Times itself, alas, won’t allow those who aren’t paid subscribers to see it without becoming subscribing. One issue is what will happen to Pacific Asia --- presumably the region Wolf is referring to, rather than Central Asia or the Indian Sub-Continent or the Near East as it used to be called: Iran and the Levant. The other is whether China itself will become an economic giant --- dynamic, technologically advanced, and rich like the European Union and North America.

PART ONE: ASIA’S ECONOMIC DESTINY TO SURPASS THE WEST?


1) Claims about the inexorable rise of Pacific Asia, especially in the sense of its displacing West Europe and North America as the strongholds of the world economy, died down after the major financial meltdown of Pacific Asia after mid-1997 and the very erratic economic growth of the countries in the region --- both in North and Southeast Asia --- ever since. Martin Wolf has now revived it . . . dubiously. That doesn't mean that economic growth, now more or less institutionalized in Pacific Asia, won't continue steadily. It probably means that the growth will continue erratically, and at lower levels than in the decades before 1997. See the Asian Development Bank’s figures, http://www.adb.org/Documents/Books/Key_Indicators/2003/pdf/rt12.pdf

Note that since Japan, a rich developed country, isn’t included in the ASD stats here, you’ll be able to view its dismal economic performance here: http://www.worldbank.org/data/wdi2003/pdfs/table%204-1.pdf

2)The main reason for Pacific Asia’s slowdown in growth and up-and-down growth since mid-1997 : the financial and currency crisis underscored how tenaciously rooted and far-ranging the countries’ institutional problems in the region happen to be --- legal, financial, business organizational, political, and administrative happen to be. The crisis, in short, wasn’t just a transitional financial shock; it’s institutional, structural, and maybe even cultural. Since 1997, moreover, few of the serious legal, administrative, and economic deficiencies have been tackled with vigor. Some policy changes have, by contrast, been undertaken; but not critical ones --- including the lopsided reliance on export-led growth . . . with its heavy dependence on the health of the American economy and continued export drive to it. (Between 1997 and the end of 1998, the US --- which imports three times more in Asian manufactured products on a per capita basis than the EU (and even more than that for Japan) --- found its current account deficit with Pacific Asia (and the rest of the world), close to $110 billion in 1997, soared 60% the next year, and then by about 70% in 1999. See the BEA tables for the balance of payments, http://www.bea.gov/bea/newsrel/trad1303.xls

3) The fate of Japan's economy --- touted by the same people and others as late as 1993 or 1994 as slated to surpass the US economy in GDP by 2000, and in per capita income a decade later --- ought to be an object lesson here. For the last 12 years, it has compiled the worst economic record of an industrial country since the Great Depression. Industrial production has fallen off, for that matter, more than it did in the US during the Depression.


4. Of the Pacific Asian countries, only China has maintained consistent high-level GDP growth --- or so official GDP figures published by Beijing claim. Is the claim sound? Will China’s economy emerge as a rival to the US’s in economic flexibility, technological progress, and per capita income in the next three or four decades? The answer to this will be what the rest of these remarks will deal with.


PART II. CHINA’S INEXORABLE MARCH FORWARD? WHAT IN FACT HAS BEEN HAPPENING TO ECONOMIC GROWTH THERE?

1) Nobody knows what the actual rates of Chinese GDP growth have been since the post-Mao era of economic reform began in 1978.. Even before the noticeable slowdown after mid-1997, when the Asian currency and growth crisis erupted, the claims by Beijing that they had grown at an average 8.0 annually --- using official Chinese deflators for inflation --- between 1978 and 1995 were disputed by a variety of western specialists and international agencies. The World Bank’s China 2020 --- an unusually well done team effort, advised by numerous academic experts --- put the annual growth rate as 6.8% over that 17 year period. (See p. 3, World Bank: 1997; a fuller explanation of the growth estimates along with a growth-accounting model is found in Annex 1, pp. 105-109).


2) To go as far as Thomas Rawksi --- a well-known specialist at Pittsburgh, who noted that there has been price deflation under way since 1997 and probed carefully the input side of the Chinese economy (use of energy, raw materials and the like), to arrive at a conclusion that the economy has hardly had real growth since 1997 --- is probably to go too far. (See his impressive analysis, 2001, www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf Still, even the then head of the government --- Zhu Rongji, regarded as a technocrat mainly concerned with economic growth and efficiency --- complained in March 2000 that “falsification and exaggeration are rampant” in the official national income statistics. A Chinese commentator at roughly the same time referred to a “wind of falsification and embellishment”. To arrive at more accurate figures, the official statistical agency in Beijing --- disgusted with the information it was getting from governmental and Communist officials in thousands of localities around the country ---- tried to set up its own local sources. That was in 1998. The task proved impossible, and to no one’s surprise. How could you send a few hundred honest statisticians from Beijing to those thousands of localities, with millions of enterprises (state, collective-owned, and private) operating, and effectively monitor what an economy for 1.3 billion people was actually doing?

3)There are at least five major hurdles that the Chinese economy has to overcome to even draw near the US in overall GDP within two or three decades, never mind a per capita income gap --- right now on the order of about 7.0:1 (in purchasing power terms, even using official GDP figures) --- that would still only be on the order of about 15-20% of the American. Never mind any technological gaps:

• An inevitable slow-down in growth, in the absence of major technological progress --- something that will be hard for the Chinese to achieve unless there are major changes in economic, financial, and political institutions.

• Irrespective of technological progress, a big technological gap with the US is likely to persist that won’t be easily overcome, if ever,

• Acute allocative problems as between investment, infra-structure, social programs, environmental protection, and military capabilities,

• Most important of all, ever pressing questions as economic development unfolds of the country’s overall political stability and governmental effectiveness . . . with a highly charged conflict built into China’s developmental course that pits ongoing Communist Party monopoly against the sweeping decentralization and market-openings that will be increasingly essential if China is ever to become an advanced industrial and knowledge-based economy.

Nor is that all. As we’ll see, since the end of 1978---when economic reform began, initiating fast growth---the Chinese government has followed what’s essentially an

• “an easy-to-hard” reform sequence . . . with almost all the real difficult reforms delayed until recently and, worse, with Zhu Rongji’s determined efforts starting in late 1997 to tackle some of these hard reforms quickly running into a wall of political and bureaucratic resistance, forcing slowdowns and serious tactical retreats. This includes a shaky financial system --- state banks, and the bankrupt state-enterprises that together have a huge bad-debt problem on the order of $1.6 trillion or so (according to one Wolfe estimate) --- that remains so shaky the IMF has warned the Beijing government not to accede to US pressures to let the Yen appreciate, on the grounds that the Chinese financial system could collapse in the process.

Bluntly put , all the difficult reforms --- barely tackled since 1997 --- remain to be done. Will WTO membership accelerate the pace? Yes, likely . . . but at a price: more social tensions, protests, and alienation . . . which leads us to the last set of observations:


III. SOCIAL PROBLEMS, UNEMPLOYMENT, CORRUPTION, AND POLITICAL ALIENATION IN CHINA: THE OBSTACLES TO PUSHING THROUGH THE DIFFICULT REFORMS

1) Joblessness:

Though the Chinese government claims there is unemployment of around 1.5 – 2.0% of the work force --- 14 million --- nobody, not even the CP heads, takes these figures seriously. Why otherwise would Hu Jintao have urged the government, “at all levels,” to give priority to create jobs and find ways to ensure the livelihood of “millions of unemployed.” What might be the actual unemployment rate? We know that tens of millions of former employees in the state-enterprise sector --- roughly 120 million in 1997, just before the Asian financial crunch (and a marked slowdown of economic growth in Asia everywhere, no doubt in China too whatever official GDP figures say) --- have lost their jobs as the CP has pushed ahead to prune that bankrupt sector . . . which remains bankrupt anyway, gobbling up the huge savings of the Chinese people. Some western specialists like Charles Wolf of the Rand Corporation --- who has been tracking Asian and specifically the Chinese economies for decades --- find that the figure is around 20% (or more) --- about 170 million people, none of whom have a social security safety net. A good number of these, probably about 100 million, wander in and out of cities looking for casual work: badly exploited, they are lucky to find it.

2) Social Unrest:

Even in the best-ordered of Communist societies, ordinary people will --- unless they’re immediately executed or sent off to something like Stalin’s Gulgag (which swallowed up millions and probably tens of millions) or attacked and tortured by Mao’s Red Guards --- find ways to fight back against their oppressors. Strikes, mass protests, violent attacks on tax collectors are common affairs, especially in the urban rust areas of the North or in the impoverished regions in the countryside.

3) The Political Fall-out of All This? An Emerging Political Crisis?

(i) In particular, the claim to be building a socialist society---trumpeted as a “socialist market economy” in 1992, as more doses of capitalism were initiated into Chinese life---rings hollow in most Chinese ears, something the party itself admitted in an extraordinary document made public in the early summer of 2001 --- and the rapid growth in economic inequality and the obvious corruption and influence-peddling that mark both government and military behavior leave essentially nationalism as the main means to mobilize popular discontent.

Several public opinion surveys authorized by the party have underscored the growing alienation of the public. In 2000, one such survey found that only 35% of the population approved of China’s current condition, and the grievances listed by the rest involved mainly rampant corruption, growing inequality, and rapidly worsening inequality. Discontent with China’s current leadership and policies was also reflected in a survey that probed the views of mid-level government officials in 2000. In 1998, only 12% thought that the pace of economic reform was either too pokey or had ground to a halt; in 1999, the corresponding figure had grown to 28%; by 2000 it had jumped to 40%. Simultaneously, 44% of these same officials insisted that political reform had emerged as the most important issue facing the country.

(ii) Overall, the prevailing attitudes of China’s population and officialdom reflect a growing view that the political system was dysfunctional, braking necessary reforms while degenerating into an engine of self-serving interests on the part of CP members, the military officer corps, and the top bureaucrats in the country. Did the party leadership care? Apparently so.

A surprisingly frank report published by the CP’ inner sanctum in June of 2001 showed this. For the reasons just mentioned --- runaway corruption and nepotism, rigid authoritarianism, and economic worries, plus rising concerns with crime --- a sense of mass alienation among the Chinese people was said to be rapidly spreading everywhere; and even more worrying, more and more of the mass population was found to caught up “in the grip of a spreading pattern of collective protests and group incidents”---religious, ethnic, and social in nature,.

Why did the CCP made the astonishing report public?. Nobody really knows. Most likely, it had to do with the much awaited leadership transition in 2002: Jiang Zemin would probably retire that year, and the closer his retirement, party infighting in the run-up was bound to pick up in pace. And of course, that is what Jiang did. He retired, his place taken by his close hand-picked associate, Hu Jintao

IV. ALL OF WHICH LEADS TO THE CORE QUESTION:

Assume that no outright political crisis itself materializes. Even so, will the CP leadership be able to overcome the resistance, alienation, and protest-potential of the Chinese masses on one side --- and within its own CP ranks on the other --- and:

1) Reform itself and the top-heavy governmental and administrative systems.

2) Implement a rule-of-law, reduce and hem-in pervasive corruption, and overcome the cynicism of the Chinese masses.

3) Carry out the essential reforms of the economy and political systems, including vast decentralization and deregulation and freedom, the outcome of which will destroy the existing power, privilege, and --- thanks to rampant corruption and nepotism --- huge opportunities for wealth-making that the existing CP elite enjoys: less than 3% or so of the Chinese people.

4) Reform of the political system, remember, entails massive opening to the Chinese masses, most of whom feel alienated from the existing system and see the CP and the government as largely engines of self-advancement, self-aggrandizement, and self-enrichment. Has there ever been an entrenched elites of this sort that has carried out necessary reforms, political and economic and legal, that amount to political, economic, and legal suicide?

Even in the far more open, formally democratic Japan, the single-party dominance of politics by the Liberal Democratic Party --- about 50 years long now --- has been a major obstacle to carrying out the necessary institutional and policy changes to overcome the mountains of market inefficiencies and financial debt that plague the existing economy. China --- far less advanced, far more trammeled by incoherent policies, far more protected, regulated, and debt-ridden --- has an even more entrenched, cut-off elite . . . just as, even more than the leaders and backbenchers of the LDP in Japan, have been able to aggrandize power, prestige, privilege, and wealth for themselves on a vast scale, with corruption, nepotism, and various doses of repression, nationalist imagery, and a very uneven delivery of economic growth (benefitting about 50-60% of the population at best)used to continue their entrenched, highly manipulative control of Chinese life.

No doubt, too --- exactly like the LDP heads --- the CP heads would like simultaneously to make their country as rich as the US and as powerful, or even more so. Not though, it turns out, if it means a reform program that would undercut all their power, privileges, and wealth-orgies that now mark their leadership. Will it change in the future, this hold on power? And if it doesn't, what happens to the quest after China's grandeur and ability to rival the EU and the US economically and the US as a peer-competitor in power and influence on the global scene?



Posted by: michael gordon on September 22, 2003 10:14 PM

In my post here, just finished, I forgot to mention that several articles dealing with China and its future --- economic potential, political change, and power-potential as a possible peer-rival of the US --- are treated at length on my new web site, http://www.thebuggyprofessor.org Especially:

"China's Growing Economy: A Threat to the US or an Opportunity? " http://www.thebuggyprofessor.org/archives/00000102.php

"The Short-Term Impact of China's Soaring Trade Surplus with the US: What to Do", http://www.thebuggyprofessor.org/archives/00000113.php

"Worries about the US Trade Deficit and China: A Reply to a Visitor," http://www.thebuggyprofessor.org/archives/00000119.php

--- Michael Gordon
The Buggy Professor

Posted by: michael gordon on September 22, 2003 10:28 PM

Yeah, people worldwide are flocking to register their students in the failing American schools. A tip of the hat to Jim Glass for once.

Posted by: zizka on September 22, 2003 10:32 PM

"Isn't it a stylized fact by now that when a country crosses into first world status (whatever that maybe) growth slows down to match other first world countries?"

GDP growth in Ireland in 2000 was 11.5%(!). For the entire 1996-2000 period, the GDP growth rate averaged more than 9% per year(!). Growth in Ireland has slowed considerably since then, but at least in the late 1990s, Ireland was growing as fast as just about any third-world country.

http://www.may.ie/academic/geography/Documents/PBhandouts_02.PDF

http://www.cato.org/dailys/04-21-03.html

There's no good reason why U.S. GDP growth couldn't average 5+% per year for decades at a time.

Posted by: Mark Bahner on September 23, 2003 09:09 AM

Ireland was grossly underdeveloped until the mid 1990's. Just because they're in Europe meant they were a true First World Nation. There's a reason why Irish men and women left to find work in the UK, Germany, Australia, and the US! Massive EU aide kept Ireland at European standards. And this is recent history from the 1980's and even early 1990's - not old stuff. Ireland has fast growth because it is a developing nation that finally implemented pro-growth policies.

Posted by: Chris Durnell on September 23, 2003 11:50 AM

Ireland was grossly underdeveloped until the mid 1990's. Just because they're in Europe didn't meant they were a true First World Nation. There's a reason why Irish men and women left to find work in the UK, Germany, Australia, and the US! Massive EU aide kept Ireland at European standards. And this is recent history from the 1980's and even early 1990's - not old stuff. Ireland has fast growth because it is a developing nation that finally implemented pro-growth policies.

Posted by: Chris Durnell on September 23, 2003 11:52 AM

Mark Bahner asks:"Isn't it a stylized fact by now that when a country crosses into first world status (whatever that maybe) growth slows down to match other first world countries?" Here’s a response.

I. CONVERGENCE THEORY AND CATCH-UP GROWTH: LEAD AND FOLLOWER COUNTRIES

1) The first answer: yes, sooner or later what in convergence catch-up theory are called follower countries --- which will initially grow much faster than the lead country or countries with their more advanced levels of technology, productivity, and per capita income, and often for decades ---- tend to slow down in growth as they close the gaps in productivity and per capita income and approach the technological frontier.

Hence the US, for decades after WWII, grew slower than any of the other industrial countries in West Europe or Japan --- later, the East Asian dynamos --- until the 1980s.

By the end of that decade, Germany and Japan -- for instance -- had raised their per capita income (calculated in purchasing power terms) to about 85-90% of the US level . . . only to fall back to around 70% since then (for reasons to be discussed momentarily).

2) Not all developing countries will be caught up in steady catch-up convergent growth on the lead country. Essentially, there are institutional and educational pre-requisites: stable government, fiscal responsibility, protection of property (in China, still haphazard), ability to defuse ethnic and class conflicts (in Asia, by authoritarian government after WWII until the 1990s; and still that way in China), and --- not least --- a sufficiently high level of education and literacy so that the country’s labor force can use modern technologies with skill . . . almost always, of course, by importing them from the lead country or countries and showing an ability to defuse them over swathes of their economy through positive spillover effects. China’s big growth as the poorest country in Pacific Asia, for instance, didn’t begin until the post-Mao market-oriented reforms, carried out initially in the countryside, after 1978. Its growth rate since then --- calculated in official figures to be around 8.0% annually --- is probably at least a third lower than that, and maybe lower still. All the same, it’s a high GDP growth rate for 25 years (unless, as someone like Thomas Rawski has argued --- see above --- the rate since 1997 has been close to zero.)

3) William Baumol --- who, along with Moses Abramovitz of Stanford, is the pioneer of modeled convergence theory --- calls those countries able to launch themselves onto a path of sustained economic growth “members of the convergence club.” The backward economies of Central Asia, Pakistan, the Near and Middle East, and Tropical Africa --- in contrast to North and Southeast Asia and India, plus several countries in Latin America like Mexico, Chile, and Brazil ---- don’t meet these institutional and educational pre-requisites, any more than the Communist Soviet union . . . after its initial quantitative-driven GDP in the early Stalinist period.

II. WHAT EXPLAINS WHY COUNTRIES QUALIFYING FOR THE CONVERGENCE CLUB WILL GROW FASTER THAN LEAD COUNTRIES?

1) Essentially, above all else, the follower countries have more abundant capital investment opportunities, with a higher return on low levels of cumulative capital stock, than the rich lead countries.

2) Simultaneously, in the early stages of sustained GDP growth, they have more opportunities at reallocating capital and labor from unproductive subsistence agriculture and unproductive handcraft industries ---- or, in the case of China, a bloated, low-productive collectivized agriculture (where about 2/3 of the Chinese labor force was employed in 1978 at the start of the reform era) --- and shift them to more market-oriented, growth-potential industries. China’s reforms leapt ahead in productivity precisely on this score, once a combination of private ownership of land (not legally recognized still) and private and communal-owned manufacturing industries got under way. Within a few years, agriculture output soared; about a third of the peasant labor force streamed into the new manufacturing industries; and all this happened even though the state-owned sector throughout the 1980s and early 1990s continued to grow in employment too. Since 1997, the regime --- despite major social tensions, strikes, and protests --- has pruned the state-enterprises of about a third of the 120 million employees, with the laid-off workers moving into the ranks of the unemployed, of the transient swollen temporary workers moving in and out of towns and cities looking for work, or into the underground economy, including surging crime.

A related reason for successful reallocation of capital and labor in China, then, has been the opportunities for higher productivity of reducing the bloated, bankrupt state-owned enterprises, over a million at one time, with the CP party’s goal, it seems, to further reduce these to about 10,000 giant firms that it no doubt hopes to use for controlling the economy, including giant private firms with multinational partners --- and of course the banking system --- in ways that paralleled the corporatist authoritarian reign of the South Korean military from the 1950s until the 1990s. The commanding heights of the economy will be ostensibly privatized or told to operate as private firms; but they will have multiple layers of formal and informal protection, get privileged access to capital through the banking system (whether or not its officially nationalized or not), and enjoy higher wages without formal rights of free unions for their labor force as ways to buy off the workers. All the rest will have to fend for themselves.

And a final reason for the initial leap in productivity growth in the 1980s has to do with the ways in which service industries weren’t counted as part of GDP (or its equivalent in state-centralized economies). The shift to market reforms in the 1980s brought these service industries into official GDP for the first time. The result? Productivity leapt ahead too in line with the newer, higher levels of GDP.

3) On top of abundant investment opportunities and initial opportunities for reallocating capital to more productive uses, China --- like other countries launched onto a path of sustained catch-up convergence --- can import technologies developed abroad, diffuse them, and hence experience technological progress on the cheap. This can be done either by use of royalties or inflows of multinational capital and plants, either wholly owned by the home-country firm or in partnership with Chinese firms. The Chinese government has preferred the latter course. In the upshot, it has become the largest recipient of multinational investment in the developing world; and this year, it has looks like receiving more inflows than even the US, until now the biggest target of such investment.

By contrast, the closer a country that progresses technologically this way approaches the lead countries’ levels of advanced technology and hence the technological frontier, the less it’s able to rely on such technological transfers, and the more it has to switch to its own technological innovation and breakthroughs . . . a far more intellectual challenge, and much more costly in R&D as well. Japan may be an object lesson. Though its big export-oriented industries have shown a remarkable ability to import US and EU technological innovations --- automobiles, TVs, VCRs (developed by RCA here and Phillips in Holland), DRAM chips, photography etc --- and improve impressively on their production in both quality and cost-reduction, its firms and universities are not known for technological innovation, and Japan’s industries have faded in ICT and biotechnology (ICT refers to information and communication technologies).

4) And of course, topping everything else as a way to grow rapidly in the initial stages of catch-up economic growth, a poor follower country can rely on export-led growth, particularly into the rich leader countries markets. In principle anyway. In reality, Japan and even the EU have blocked a great deal of Pacific Asian exports in competitive industries (with Japan’s big firms slightly an exception, where the production of inputs is carried out by the cheaper labor forces in their multinational offshoots in China and SE Asia: but without noticeable transfers of their own advanced technologies to them, unlike what US advanced ICT firms have done in transferring large amounts of technology to Taiwanese partners above all). The US market, by contrast, is much more wide open. In consequence, by the late 1990s, Americans were absorbing three times the value of Pacific Asian mfg. exports on a per capita basis compared to the EU, and even more so than that for Japan.


III. WHY CHINA’S GDP GROWTH WILL LIKELY SLOW DOWN, NOT JUST MUCH FASTER THAN JAPAN HAS THE LAST 12 YEARS, BUT COMPARED TO THE EAST ASIAN SMALL DYNAMOS LIKE HONG KONG, TAIWAN, SOUTH KOREA, AND SINGAPORE.

1) If you look at Japan’s growth rate since 1975 --- the big turning point in post WWII economic growth in the industrial world --- you will find that not only did its rate of GDP annual growth slow down by over 2/3, compared to the US’s slow-down by 1/3 over the previous 30 years, but also that the US GDP rate has been slightly higher. Germany’s rate slowed down by about 55-60% too. As a result, though both had closed the per capita income gap with the US from around 40-50% in 1950 to close to 85-90% by the late 1980s, they have fallen back to around 70% since then.

2) The simplest explanation? The poorer a follower country is when it begins convergence catch-up growth, the faster it will initially grow in converging on the lead country or countries. Oppositely, when capitalism shifts course radically --- big shifts in the most promising industries, big shifts in technology particularly in a period of general-purpose, radically restructuring technologies like ICT and biotech and now nanotech, and big shifts in market dynamism thank to globalizing activities --- the faster these countries’ growth rate, it appears, will slow down.

3) To clarify briefly, institutions and cultural habits and policies that worked well in the past turn out, in such eras of technological flux and globalizing redistribution of economic dynamism and market structures, to have rigidified and harden and hence to resist market-driven adaptation.

Remember, the poorer a follower country is once it begins sustained GDP growth over several decades or more, the faster it will grow for the reasons mentioned in II. In the process, it develops a series of corporate governance, financial institutions and relations with big corporations (cozy banking and corporate interlocking directorships, with Japan going further and having join ownership of banks and corporations by each other), a larger state role to compensate for a lack initially of large numbers of entrepreneurial middle classes --- a Japanese and German and French pattern going back to the 1870s and 1880s, as Alexander Gershekron best explained decades ago --- and various crony relations between financial, corporate, and administrative agencies. A variety of subsidies, protection, and industrial targeting (more so in Japan than in Germany) will likely emerge too as a way of trying to leapfrog technological steps and advance on the front-running lead country or countries. Export-led growth is built into such a system, what with the poor levels of per capita income in the country . . . and of course in the case of Taiwan, South Korea, Taiwan, and Hong Kong, a fairly small population to boot. In short, the institutions, policies, and cultural habits of the fast-growing follower countries embody from the outset a logic contrary to standard free-market assumptions about flexibility, adaptability, and efficiency.

Assume now that these institutions, policies, and informal relations work successfully for decades, despite their conflict with standard market-theories . . . . just as they did in Germany and Japan in the late 19th and early 20th century, then again after WWII, for the first 3 or 4 decades after 1945. They harden into a rigid status quo, the more so if government or corporate welfare leads to increasing rigidities in labor markets, blunted incentives to entrepreneurial innovation, and the lavish use of subsidies or other forms of protection to insulate the economy against change. Germany, of course, is part of an EU free-trade system, and that helps offset some of these features. All the same, its economy as Adam Posen has noted resembles more and more the Japanese statist-trap, with belated reforms now underway.

4) Can we be more specific? In particular, what explains concretely the rigidities and built-in institutional and cultural resistances to effective adaptability to change?

Apparently, it seems, it’s largely due to blunted competition in the home market, with a reliance on giant cartel-like elite corporations and on decades on export-led growth behind various kinds of restrictions on such competition --- either domestically or in the form of protection against foreign competitors . . . plus, it’s important to add, the need to buy social peace among the masses in the thinking of the political elites. Japan and Germany, for instance, experienced bursting violence and extremist ideological and class-based conflicts in the interwar period, followed by brutal Nazism in Germany and fascist-like militarism in Japan, with whipped-up nationalist frenzy for rallying the masses and ruthlessly aggressive war abroad. After WWII, the fear of similar conflicts pervaded the West German and Japanese political system and its corporate, administrative, and political elites’ thinking.

All worked fine for decades. Specialists and journalists galore, by the late 1980s, saluted the Rhineland model of corporatist capitalism and the even more successful Japanese corporatism, slated, it was said, to overtake the US in GDP in a decade, then in another decade in per capita income . . . with the US, it was further argued, in need of adopting one or other of the models: more welfarism, more regulation, more industrial targeting, more subsidies and protection, much less competition and far more cozy cooperation between government, big finance, and corporate firms.

5) The outcome? In an era of major technological flux and globalizing shifts in capitalist dynamism --- new competitor countries, big changes in growth industries, a need for entrepreneurial creativity, and major policy adjustments in the public sector --- these institutions and cultural traditions, at odds with market efficiencies, have proved unable to adjust effectively. In the process, Japan will be lucky, it seems, if it manages to stay even near the front ranks of industrial countries --- its record in GDP growth since 1991 the worst in the industrial world since the 1930s --- while Germany has emerged as the worst grower in the EU, a big break according to the recent IMF projections, on EU economic recovery in an era of stagnant growth.


IV. MORE SPECIFICALLY, WHY CHINA’S GROWTH WILL LIKELY FOLLOW A SIMILAR PATTERN, ONLY AT A FAR EARLIER STAGE OF DEVELOPMENT

1) Japan and Germany, for all their troubles, are advanced industrial countries with a century or more of big economic growth behind them, good universities and a research base, and since 1949, an effective political system in both for dealing with conflict and winning democratic consent. (Japan’s, it’s true, is dominated by a single party, the LDP itself a brake on change because the electorate really has no way of punishing a government for economic failure as the Germans at least do.) China, by contrast, remains an authoritarian system with far more market inefficiencies --- in fact, an incoherent system of corporatist capitalism and small-firm capitalism on one side and a bankrupt bloated state-owned enterprise system and shaky and probably near-bankrupt state-owned banks on the other --- without built-in safety nets and no effective means other than threats of repression and crackdown on dissent for handling the swelling waves of social discontent, social tension, and social conflicts that have been at work there for well over a decade now . . . along with more and more strikes and street-protests. Only in the rich booming areas of the southern coastal cities is social peace more or less in existence. And the entire domestic market remain fragmented, across regions and within them.

2) On top of that, recall a key point in the argument that was set out earlier in this forum: the government has followed since 1978 an easy-to-hard reform sequence, with all the difficult reforms still lurking in the wings: a drastic pruning of the state-enterprise system, a sanitization of the shaky, debt-plagued banking system, far more decentralization of decision-making to private firms, the need for allocating more and more capital to a social security safety net and environmental protection, the need for a drastic overhaul of education, and the pressing urgency of improving managerial skills and opening up the economy to competition, whether home-grown or foreign-generated. For that matter, the protection of private property languishes; and the legal system hardly protects intellectual property rights, which results in systematic piracy of others’ innovations and brakes technological creativity in the home market by undermining the ability to inventers and innovative firms to capture enough profits to implement risky innovations.

3) Nor is that all. The huge gap between urban areas and the countryside persists, with agriculture, where the reform era started, badly neglected since the mid-1980s . . . as does the gap between regions, especially the booming southern coast and the northern rust belt and the interior hinterlands.

Even with an effective, adaptable, and legitimate political system --- which China lacks, and will lack increasingly the more epochal economic upheaval goes on with a CP authoritarian system in place, itself dominated by a privileged powerful elite that’s also growing rich in the process --- these institutional and policy reforms and changes would be hard enough. In the existing system, the chances seem slim.

4) One final point. For reasons mentioned earlier about convergence catch-up growth, abundant early investment opportunities, and reallocation of capital and labor to more productive industries at the start of the post-Mao era and into the 1990s, China’s GDP growth can’t be said to be strictly quantitative. . . a matter of more and more inputs of capital and labor in standard neo-classical form. Productivity did advance, especially what’s called total factor productivity, which is captured among other things in the World Bank’s outstanding 1997 study, China 2020, especially in the first appendix that sets out a growth accounting model.

All the same, since the initial big reallocative changes, about the only qualitative technological advance to keep productivity growing has come from the huge influxes of multinational investments. Even then, China is not the recipient of advanced technological transfers; and the early hopes of its post-Mao leadership in the 1980s to leapfrog technological progress and join or better the Japanese, the US, and West European levels of technology have proved a big failure. Even today, two decades later and with trillions of dollars invested in highly protected industries, China’s main exports are of low and middling-technology, and its firms are used by its multinational partners for cheap, finishing production for the most part.

5) In short, despite a greater reliance on foreign technology imports, multinational inflows, and exports abroad compared with the Soviet Union (and of course Maoist China), China’s economy since the early reforms seems to be depended on more and more quantitative inputs of capital and labor with slower qualitative, productivity-driven advances the last decade or so. The predictable outcome?

Diminishing returns will --- without the difficult reforms mentioned a couple of moments ago implemented --- very likely set in as capital accumulation goes on. The Soviet Union, after all, grew rapidly for two decades or so in the Stalinist era, and then in the 1950s and early 1960s, until diminishing returns overwhelmed its rigid statist economy, and it turned into a bankrupt system, unable to shift to qualitative productivity-driven growth. For that matter, hard as it may be to believe, Brazil and Mexico grew from 1950 until 1980 or so just about as fast as China has since 1978 --- somewhere between 6.0 – 7.0% annually. Then their institutional, policy, and cultural traditions proved inflexible and increasingly inefficient, and they suffered big setbacks until the more recent restructured forms of development began in the mid-1990s (with NAFTA a big thrust to Mexican growth since then).

On all these grounds, China’s bursting economic future looks fraught with problems and threats, not promise as recent rhetoric, including apparently Martin Wolf’s, seems to imply. Oppositely, as the performance of the US economy since the early 1980s shows in this new era of capitalism --- new flux caused by radically restructuring technologies in ICT, biotech, and now nanotech, plus globalizing shifts as capitalism spreads into Asia and the former Soviet Union and a premium is put on economic flexibility, adaptability, and innovation as well as entrepreneurial start-up firms --- the lead country can sustain its lead and even increase it against its rival follower competitors if their institutions, policies and regulations, and cultural habits prove less flexible, less adaptive, and less innovative.

The implications here for the future are easy enough for anyone to draw, no?

--- Michael Gordon
http://www.thebuggyprofessor.org


Posted by: michael gordon on September 23, 2003 11:58 AM
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