Scott Sumner  

How long can the China boom continue?

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[I wrote this post 10 days ago. Tyler Cowen blogged on the same subject today, so I figure I better post it before it becomes old news.]

China's been booming since it started moving away from communism in the late 1970s. In recent years the growth rate has slowed, from double digits to about 6.5%. Some people expect it to slow much further in the near future.

The Financial Times has an interesting graph (which they got from a management company), showing growth rates as a function of income per capita, relative to the US. The graph includes China and 4 other Asian economies that had long periods of rapid growth:

Screen Shot 2017-06-22 at 7.42.01 PM.png\The darker red dots show China, which has advanced from extreme poverty to a level about 21% of US incomes (this is in 2014, it's a bit higher now.) The article is relatively optimistic about China's growth prospects, pointing to the fact that other East Asian countries maintained growth rates of 6% to 8% until they reached about 40% of US levels, after which growth slowed gradually. (Japan actually started going into reverse in the 1990s, losing ground relative to the US.)

It seems to me that this will be an interesting test of the "institutions vs. culture" debate. Some people have noted that much of the developing world seems to get stuck in a sort of "middle-income trap" where they stop catching up to advanced countries once they reach the level of Brazil or Turkey or Thailand. The exceptions seem concentrated in East Asia, especially places with Chinese, Japanese or Korean cultures. (Vietnam is occasionally included in this group.)

Others suggest that good institutions are the key to growth, and the huge divergence between North and South Korea is cited as a powerful example. Although China has done a lot of market reforms, it remains considerably more statist than the rest of East Asia.

So the "cultural" theory of development suggests that China will continue growing at a fairly rapid pace. The institutional theory suggests that China might get stuck in a middle income trap. Personally, I'm less optimistic about China than one might expect from the FT graph, because I think good institutions are pretty important. However, I'm not quite as pessimistic as many other observers, as I believe China is likely to continue reforming their economy. China seems more committed to eventually becoming a rich country than is the case for places like Brazil, Turkey and Thailand. Thus, for example, China spends far more on infrastructure than Brazil, and far less on transfer payments.

Because of all these factors, I expect Chinese growth to slow somewhat over the next decade, but also to maintain a pace well above most other middle-income countries. It is still on course to become fully developed country, albeit it will take China a bit longer than more free market places like Singapore, Hong Kong and Taiwan.

PS. One way to understand China is to read this story about some determined Chinese peasants who built a 6-mile irrigation canal through three mountains, and then watch this amusing one-minute youtube video.

It's all the same country.

Screen Shot 2017-06-23 at 9.48.39 AM.png

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COMMENTS (4 to date)
jc writes:

Sorry to open w/ a somewhat tangential reply, but Doug North seemed to be screaming at the top of his lungs for scholars throughout the social sciences to form a unified theory of institutions that showed how informal institutions (e.g., culture, or McCloskey's or Mokyr's "virtues" or "ideas") and other factors (e.g., historical events, Ridley's "ripenings", fossil fuels, etc.) shape formal institutions.

Many formal rules are reflections of informal norms, lagging indicators that then help propel us forward (i.e., they do more than just indicate). And if they're durable (e.g., inertia or with aligned special interests that piggy-back on them), then even if culture shifts, the incentives embedded within the formal institutions may still offer positive behavioral prods. (Or negative ones, in the case of enduring growth-inhibiting rules.)

And the formal and informal often conflict or complement, e.g., it's not always culture vs. laws or simple, isolated linear's complex behavioral systems.

You could even bring in an element of biology or, at least, sociobiology or studies of evolved cognitive biases or preferences, if you wanted to create a true Theory of Everything Institutional. Lots of parallel streams that never talk to each other are often redundant, but often also full of information could be nicely integrated to create a general theory.

(Of course, sometimes certain elements are actually antagonist towards each other, e.g., some sociology-based institutional theorists who dislike anything smacking of biology or efficiency, such as Pop Ecology, or referring to "mimetic isomorphism" by its other more common name, "herd instinct"...which does, btw, have its own embedded logic, i.e., sometimes the "irrational" has underpinnings that are, or at least were, quite rational at the level of evolutionary logic.)

The thing is...there's nowhere to publish this stuff. Maybe a book. I bet interesting models already exist in people's file drawers.

Scott Sumner writes:

jc, I'm skeptical as to whether anyone will ever be able to come up with a unified theory of institutions. The world is simply too complex.

Todd Kreider writes:

Japan had caught up to the U.K. in 1980 and France in 1989 and have held about even up to now. South Korea is almost there as well.

Japan and the U.S. have grown at roughly the same rate since 1991 except for a small slide in the early 90s and the period from 1996 to 2000 when the U.S. grew strongly but Japan averaged 0% those five years.

According to the OECD, Japan's GDP per capita was at

86% that of the U.S. in 1991,
83% that of the U.S. in 1996
73% that of the U.S. in 2000
72% that of the U.S. in 2007 before the recession 72% that of the U.S in 2016

I'd argue that a major difference between Japan and U.S growth over the past 25 years was that the 1997 East Asian financial crisis hit Japan hard and didn't affect the U.S. very much.

Miguel Madeira writes:

Perhaps both "culture" and "institutions" could be considered simply as subtypes of "QWERTY"?

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