Many very fair points. To me, China's biggest growth potential lies with its still-to-be urbanized population and human capital. On urbanization, China is now 60% compared to OECD's average 80%. China's higher education obviously isn't world-class and it may never be, but the university graduates do carry way significantly more skills th…
Many very fair points. To me, China's biggest growth potential lies with its still-to-be urbanized population and human capital. On urbanization, China is now 60% compared to OECD's average 80%. China's higher education obviously isn't world-class and it may never be, but the university graduates do carry way significantly more skills than the previous generation. In TFP terms, a Chinese worker is now about 2/5 as productive as their US counterparts; if you think Chinese workers could reach 3/5 with the increasing human capital, then China still has lots of growth potential to sustain China's rise but not necessarily catching up.
Hi Owen, Thanks for the nice engagement. These discussions are really honing my thoughts as well and I'm grateful for the opportunity to have them. I agree a lot of people have been predicting China's decline since the 90's, both for political reasons (people like Gordon C. Chang who make strong pro-freedom arguments but without an understanding of the underlying economic situation, imo) and economic reasons (lots of free marketeers with no understanding of the ability of government to successfully invest in massive infrastructure projects in developing countries). But I would say, simply dismissing macro arguments doesn't appear to me to be feasible, because even in your thoughts, macro data like urbanization still must be used, so I don't see how we get away from it. We just need to choose the right data, and have the right/best understanding we can.
As you can probably tell from my arguments above, I'd tend to agree with Dan Berg on this one, "urbanization" in and of itself just means people moving from the country to the city, but the decisive question is, what do they do once they get there? Just having people live in closer proximity to one another doesn't automatically create growth, it's a question of what economic activity they do, so the macro data doesn't capture the real situation (as it often doesn't and as you noted).
Gains in education certainly make the population's POTENTIAL much higher, but in an economy where 50% of resources are controlled by the state and deployed very inefficiently at this point (mainly in infrastructure projects), and just 40% of money ends up in private hands (household consumption), the question is will the country be able to USE the great potential of its people. That's precisely the issue, if the CCP actually were to transfer a massive amount of state-owned assets to average people, and dramatically raise incomes, well you would have an absolute boom in demand for education, better (affordable) housing, better food and food safety, better health care, and on and on, and that would provide incredible opportunity for the educated young people (who are ready and raring to go as you noted). In addition, if laws, monopolies, corruption etc were much improved in the poorest rural areas, combined with dramatically growing income, people could urbanize in their booming local areas rather than moving to the top cities (the difference in GDP per capita between the poorest Chinese provinces and the richest is like around 7 I think, where as in the US Mississippi is about only half as poor as the richest state, excluding DC, and that has to do with better institutions in Mississippi as compared to the poorest Chinese provinces, i.e. even the poorest US states still have reasonably uncorrupt government and enforcement of business law).
But with only 50% of the country's resources being used efficiently, and far too high a % of the economic gains going to the government and business and the ultra-rich for savings and investment rather than the average person for consumption for a better basic material life and opportunity and health for their children, the country is massively hamstrung. Sure, migrant workers can go to the cities and get jobs in construction building more needless infrastructure (which is what they do, of course you can be a kuaidi xiaoge, and then a waimai xiaoge, the 50% private is incredibly innovative, but it's crushingly just half the economy or so), which isn't productive so shows up as debt, so debt explodes, and then you need more stimulus for more needless infrastructure, and around and around it goes until the GDP growth target can't be reached anymore and everyone realizes building more is futile and the economy stagnates. That's the basic economic situation, which of course coexists with an innovative and thriving and exploding internet and tech sector, but that is severely limited in its impact by the massive state involvement in the economy and the unequal distribution of final income between gov't/business/the ultra rich saving and the average person consuming.
Thank you David for engaging with me constructively as well. I also learned a lot from your writing. I’d certainly agree that macro structural conditions matter a great deal—my response was a reaction against swinging too far to the macro direction to the extent we ignore the micros—because ultimately it is action (taken by specific individuals) not just conditions (all the structural ones) that propel social change. But if I were to analyze China’s political economy seriously, I’d at least do it in three-levels, namely the structural (demographics, public finance (debt), infrastructure, etc.), the institutional (property rights, IP, private&public economy, etc.) and individual (human capital, work ethics, etc.). All three levels are interlinked and exerting influence on one another. All three are important. I think we often tend to exclusively take a top-down perspective (structural to individual) but dismiss the bottom-up avenue exists (better educated individuals could drive institutional, even structural changes; think of, say, Jack Ma). My comment was meant to push back on that but in no way to reject the other.
I agree with Mr. Peng and Fukuyama that urbanization without industrialization is problematic. The most salient examples are in Africa. People moved to cities en masses and slums emerged as a result. In China’s case, I think the government is aware of the risk and does not want slums to appear in cities. Unlike Africa, they also have the state capacity to regulate the migrant flow and force people out as they deem necessary (“the low end people” in Beijing). But I think rapid mass immigration to cities only happened in a few mega cities; in the rest of China urbanization mostly took place gradually and naturally. Of course, there are exceptions, particularly when the local government wants to grab land from famers for real estate development or to achieve some quick poverty reduction goals (moving people from mountain top to townships). Those people face real problems finding jobs. But overall, I think China’s urbanization proceeded orderly and gradually. That is good because they allow the job markets to develop. More people do create more demands. That is the lump of labor fallacy I warned against. But only if the process happened gradually can labor market develop. You really want the new migrants to mingle and be employed by non-migrants otherwise you risk having a enclave economy like in slums.
I totally agree with the institutions. China needs to improve its institutions to continue to release its people’s potential. Yet institutions can’t get the work done alone and can’t really sustain itself. There are people like Deng and Trump who can change institutions from above and countless policy entrepreneurs at the local and central level (Tightening party control is not gonna help such entrepreneurship for sure). Not to speak of SMEs and middle class that have pushed and will continue to push for better governance and institutions. My point was that if these people become more educated and cosmopolitan-minded, the chances for better institutions will increase.
Better infrastructure, especially of transportation and telecommunication, will facilitate connecting creative minds. China’s e-commerce would not be where it is today without the excellent logistics infrastructure. It may have decreasing returns but overall I believe it is better than debt-sponsored consumption.
The very smart Larry Summers has an interesting answer when asked about building airport in China (cited in full below). The same can be said about industrial policies. Larry's answer is more nuanced than the much-teased popular memes such as "bridge to nowhere" or "picking winners." The problem with reading only macro data and newspaper articles is people may never get to appreciate such nuances.
" You’re a rapidly growing Asian country, and you decide to build an airport somewhere where there aren’t very many people. You do that because it’s going to be cheap to build it now, when there aren’t a lot of people around, and it’s important to establish the land. Then 15 years later, if you’ve grown fast, you’re a brilliant hero of masterful long-term planning, and if you’ve grown slow, you’re an idiot who’s building an airport where nobody wanted to go. It’s hard to know which is the case. The Japanese probably look stupider than they really were because they built in anticipation of more growth than they, in fact, were able to generate. I don’t know quite what’s going to happen with respect to China. It’s not unlike Dulles Airport. Today we think of Dulles Airport as an important strategic stroke that cemented and made possible a hugely vibrant technological economy in Northern Virginia. I’m old enough to remember in the late ’70s or early ’80s when it was a generation after Dulles Airport was built. It was a ridiculous idea, built a million miles from anywhere, and like, “Why did we build that?” So it’s very difficult to judge some of these infrastructure investments except in the very, very long run. Even when you judge them in the very, very long run, you can make a judgment ex post as to whether they were a good idea, but even then, it’s going to be even more difficult to make a judgment about whether they were ex ante sensible or ex ante not sensible"
Hey Owen, Good stuff. Like the tripartite framework (structural, institutional, individual), and totally agree of course about the importance of individual initiative writ large, and the importance of IP protection and the institutional factors. China has all these going and more, which is why I've come around to the view that in the area of leading tech, their system will continue to be a real competitor despite the ban on critical thinking in many areas because within the physical sciences, independent research is allowed, and in that area of the economy (tech), it's private, until the company gets so big that it must start taking macro political orders from BJ (on things like censorship, backdoors etc, but those don't affect the company's R&D ability it seems, at least insofar as it doesn't seem necessary to have the absolute leading creative minds which are still concentrated in American universities to get ahead in AI or at least stay close). What's your view on that? I personally used to think they would always be behind--I had a friend who was super high up at Ford China around 2010 and he told me his sense was that the CCP had basically given up on trying to produce their own world class cars because their engineers just couldn't quite think creatively enough or collaboratively enough to really get there, which to me implied a fundamental defect in the authoritarian education system, but that seems less of an issue in tech, or maybe as Kai-fu Lee said in AI Superpowers, the future of AI is more data plus decent algorithms not less data plus better algorithms so even above average programmers rather than elite ones will be good enough to stay ahead of the US.
But back to the economy as a whole, to me this is where the structural part becomes the dominant factor--if 60% of your resources aren't ending up in the hands of households, but are mainly being invested in infrastructure (even the "massive" investment in tech R&D is still only a tiny fraction of overall investment spending in China as it necessarily must be since it employs a tiny fraction of people), the impact of the structural and individual forces will necessarily be more limited relative to the macro/infrastructure factor (just as a matter of arithmetic).
And of course this assumes that it is correct to say that infrastructure spending has become unproductive in China, you brought in the nice quote from Larry Summers, and I would say that there IS one hard constraint on the ability of a country to just build unlimited amounts of infrastructure and say that at some point in the future, however distant, it will be useful, and that is debt, that is, if the infrastructure is not productive currently, it won't pay for itself, it won't provide additional value to the economy for the time being, so the debt used to create it (it is financed via loans from banks to SOE's) cannot be repaid, so overall debt in the economy increases, and as I mentioned in a previous post, if you're at 100 units of GDP and build 10% growth infrastructure (as a simple example) to get to 110, but the new 10 isn't actually productive (but is not written down since SOE's aren't allowed to go bankrupt), and then you want to grow 10% again the next year (as the CCP does since it gives out growth targets with the exception of this Covid year of course so far) to get to 121, you're really going from 100 to 121, and eventually the gap gets too big to make up for, so growth collapses and it becomes clear GDP was inflated. This is what happened to Japan, which had an identical growth model to China just less extreme in terms of suppressing consumption, Japan was 19% of global GDP in 1989 and just 6% now (a much greater decline than either the EU or US had so it's not just a matter of China claiming a greater share), and has grown at 0.5% a year since then, so that presages a pretty dismal future for China if significant rebalancing doesn't occur as I've been pointing out, even if that coexists with a dynamic tech and private sector in that areas of the economy, just as Japan has a thriving tech and entertainment sector and unique and awesome culture among the citizens/private sector even as the gov't/public sector hasn't really delivered the way it should have over the past generation plus.
Many great points. Let me start by saying a few extra words about the three levels. It would be nice to have all three develop at the same but in reality that is hardly the case nor is it absolutely necessary. China in the 1980s had almost none of three (well, except the demographics was good). Huang Yasheng argues that the Chinese economy took off in spite of not because of good infrastructure. The institutions then were also pretty bad (right after Cultural Revolution) but some small positive changes (mainly in the rural area) were enough to kickstart the economic boom. As China accumulated more capital they started to build more infrastructures, mainly in the 2000s. Then you see an upgrading of manufacture in a few clusters of the country as well as e-commerce and other service sectors (remain unproductive and underdeveloped because of low consumption rate, more on this part below). Many foreign companies don’t want to relocate out of China today because of the decent infrastructure and more developed supply chain (I study Southeast Asia. I know precisely this is a big missing piece there). But it is not true China started to develop because of infrastructure. When Chinese leaders go around selling the BRIs they often confuse (maybe on purpose) the chicken and the egg. Dani Rodrik says development is like jumping hoops. You jump to the next one after you finish the last one. Constant problem solving is the key not some grand ex ante ideal macro plans because things change so fast. The macro conditions were never so great. Political economists only developed “developmental state” concept ex post the Asian Tigers have already succeeded. Humility is very important.
Obviously, you can’t keep building infrastructure to make your economy grow (or worse, to make figures look good) as you very well said “from 100 to 121”. Justin Yifu Lin praises the capital invested in infrastructure as “patient capital” because it does not request immediate pay-off. He has a good point. The kind of “patient capital” is what private investors are not willing to provide to the developing countries. However, it is a completely different story if that patient capital becomes dead capital that never pays off on its own or create enough externalities to contribute to the economy as a whole. Basically, that becomes consumption not investment anymore. Debt-sponsored consumption is not sustainable (has been the case in the U.S.) especially for developing countries. When Chinese government keeps building more and more infrastructure, I see path dependence (because it had worked!) and problems (you and many others have pointed out) at the same time. But what Larry’s quote reminds us is that we should pay more attention to which infrastructure projects get built rather than “whether China as a whole should build more infrastructure.” I personally would classify public health facilities and sports facilities (not huge stadiums, but those that can be used by ordinary people at reasonable price and with good maintenance) as infrastructure. I see no problem even if they debt-finance such infrastructures because the externalities are huge. They also create more sustainable jobs. Long-term life guards as opposed to one-off construction team.
One small point I want to contest is the categorization of real estate as investment. To me, household buying apartments is at least half- consumption and half-investment (especially in China it’s a lease basically). Under the standard categorization they’re only counted as investment. So, when people say Chinese economy have very low consumption rate I always ask them to look critically at the data. Admittedly, I’m a minority on this.
I don’t know enough about the high-tech sector to comment. But overall, I agree with you China is not capable to compete with the US in cutting edge technologies. Most industries in China are far from the technological frontier. To sustain productivity/economic growth China only adopting mature technologies that is more than enough. They can do that with capital investment and here a well-educated workforce to use those technologies would be critical.
I’d make a controversial argument that not having cutting edge technologies is not a big deal. What cutting edge technology does Taiwan, Malaysia and Eastern European countries have? Well Taiwan may have a few now after they’re already twice China’s GDP per capita (in nominal terms); but during its boom years you don’t see as many Zaibatsu or Chaebols in Taiwan. They didn’t have MITI (high competent bureaucrats) and made many stupid mistakes (the wasted money in shipbuilding industry). Those countries all have higher GDP per capita than China. China can keep growing if it can mimic those countries. I find it very annoying many of my fellow Chinese like to compare ourselves to the US. There is not much to compare. Unless miracle happens China would no way catch up with Japan or US in this century but it does not mean Chinese economy could not advance to the level of Malaysia, Poland and Chile. You don’t need to get everything right to get there. Those countries themselves didn’t. Having revealed my nationality, I’ll stop here.
Great Analysis! I read Fukuyama's book on Greece, he also mentioned urbanization without proper industrialization will usually lead to stagnation and political decay. Things will go worse if poor provinces don't enhance business friendly environment, since the central government is subsidizing these provinces and the urbanization there will look more like Greece or Southern Italy. Local officials get lazier and more corrupt by distributing the free subsidies or relentlessly raise debt.
- Maybe some of the westward development policies are encouraging these provinces to nurture more meaningful export oriented manufacturing businesses. But again this goes back to your earlier comment on exporting to a poor neighboring country will make no sense at all.
- Enriching the laobaixing ( Bannon is using this term very often :-)
-- I wouldn't entirely agree that CCP cadres are just greedy m*f*ers. They are gradually transferring SOE assets or their profits to fund the retirement fund and healthcare insurances.
-- Split the SOE and give each citizen a fraction. This is discussed quite vividly in 80-90s, which to my understanding is one of the suggestions in Washington Consensus. CCP may think that didn't work really well in Russia/Eastern Bloc post USSR. Part of those fractions was somehow purchased by Tycoons at very low price. Or is this just a misinformation campaign by CCP? Never got a chance to study well.
----- This can be better executed now with 2020s tech. Maybe every citizen can get a digital currency wallet and contains a piece of SOE stock portfolio and no super rich can exploit them easily? But if they can't sell it immediately that is quite similar to gradually transfer those to pension accounts.
- In all, am still a bit confused by how to effectively dissolve these SOE assets. They are huge. Maybe sell it to private owners by auction and then distribute the cash to 1.4 billion LBX? It will be about 10,000 USD for each citizen using 2018 National Assets Report (to the NPC) number.
The proper way to effect the transfer of state-owned assets is a great question, and one I haven't looked at myself as much because I had to spend so much time and intellectual energy just getting to the understanding that that was probably what was needed. Obviously the 1990's Russian strategy was terrible and the neoliberal/Washington Consensus idiotic MBA professor economics types doing the advising were incredibly disingenuous and, in the end, dumb. But that doesn't change the fact that infrastructure investment in China currently is an inefficient use of resources and that therefore those resources need to be redeployed if we are going to avoid stagnation.
I'd suggest taking a look at "Avoiding the Fall" by Michael Pettis, he talks a bit about these issues. I'll have to go back and look and see if he goes into any strategies for wealth transfers, I forget. I also recommend taking a look at the works of Minxin Pei (for the logic of political reform) and Huang Yasheng (for the tragedy of rural development in Chins since Tiananmen).
scattered thoughts: Chinese population = approximately Japan + Canada + US + Mexico + all central and South America + Europe. So obviously what happens in or to China matters. But all of these people live in livable space 1/2 the size of US - so there's not enough. Period.
Not enough: space,air, water, food,jobs . . . None of this is going to change. In his history of China Klaus Muhlhahn (Making China Modern) makes the point that China really hasnt changed that much since 1644 and, I would add, is probably not going to change any time soon. The West has been trying unsuccessfully for 150 (?) years to change them into Christians or democrats. Chinese are very much like Americans; comfortable in their continental sized country; similiar sense of humor; justly proud of a rich heritage, but stuck with an abominable CCP. If the latter were to somehow disappear and some reasonable regime were to appear, China would indeed become a superpower. If not, China will continue on with ever slowing growth and suffer the consequences.
Good view point. Geography and natural resources do have great impact on a nation. That kinda explains why Chinese tend to work harder than normal, kinda obsessed with 'development', and the competition inside China is more fierce than it should be. There is an 'involution' theory summarizing over population society, it sometimes leads to oppressive social structure. India/China has basically same population and same farmable lands (1.6/1.4 m sq. km.). Traditionally the social structure are both quite oppressive I would say. (Caste/ Gentrified - Landlords)
- Regime change. I need more knowledge. Maybe India is a good example. We should learn more about her reform and progress.
- Christianization. Korea seems doing OK, right? And Taiwan. I think both have strong Christian presence. Chiang-Kai-Shek was converted in his late 30s I think. But, again, competition in China is too much, sometimes the fight is very dirty, especially for politicians.
- Thanks for the Book recommendation. Pre-ordered on Amazon and found some youtube lectures by the author.
- QING Emperors set a high standard in 1700s and left many legacies.
- There was a very close Britain-like revolution in 1900s, but the Empress died in a sudden. Everything blows up : at least 1 warlord emerged in every f*king province, and Russia/Japan can't let us go.
- Looking back, so many accidental events twisted the probably way better version of China.
I would add: when Nixon and Kissenger met Mao and were gushing about how he had "revolutionized" China, Mao replied that really not much had changed. They of course thought he was being coy. But I think he knew he had changed nothing. His attempts later on to REALLY change China were of course disastrous and China then reverted back to the norm.
Think they met in 1972? Mao failed to pick the right successor. Utmost failure for traditional Chinese emperors. Should learn from Emperor Kangxi and pick the prince with the most contradictory policy tendency then himself so the country can rebalance quicker. If DENG were not overthrown in April 1976, CHEN clan won’t have that much weight and China might already be democratized in 1989.
CHEN Yun and his pupils. Hard core soviet. He and three of his pupils out voted the reformists and made the Tiananmen decision on May 17. Should Mao explicitly chose DENG as successor and stick with it, Chen would have way less political impact. His support for DENG was decisive to out vote the formal successor HUA in 1980. HUA is politically one generation younger. It’s quite similar to early MING dynasty politics. DENG would have four more years and tighter grip in CCP, he is more inclined to support the reformist politicians. And Mao’s wife may survive politically since DENG have way stronger ties with military and won’t feel that threatened.
On a completely unrelated topic: is China once again shooting itself in the foot? With rising global food prices + China imports 80% of its food: raising tarrifs on Australian products and telling SOEs not to buy American soybeans and pork.
I would prefer any Reuters report starting with 'sources say' 70+% possibility fake news.
- in Xi time, or after 2016, there is evidently less 'official leakages' than before. There is now no meaningful opposition party factions. They won't use tips for HK media or western media as a political weapon when it use to be in 1980s-2010s.
- When Reuters or other western news agency use 'people close to XX department' or 'unnamed XX official' would be more credible than 'sources'. I think sometimes they are just using un-vetted weibo contents.
- Trade deal is probably the only thing left in China-US relations. I think CCP will hold their end of deal.
I've never understood the continuing urbanization argument; another 200-300 million poorly educated people wander into the cities - and do what? That's assuming the hukuo system is abolished - which I dont think is going to happen. How would they go about raising workers' productivity 20%? How long would that take? Sounds like a good idea - why dont we (and everybody do that?
It almost has nothing to do with Hukou. Urban Hukou is only 40% now but urbanization is already 60%. I'd suggest you look at the micro-level because macro only can tell you so much: consumption, investment, government spending, exports... it's static and boring. I've worked with many migrant children and in cities and in rural areas, the strong urge of rural youth to go to cities is what may continue to drive urbanization. Please don't fall to the lump of labor fallacy. As for worker's productivity, again, with more human capital of at the individual level (not "everybody" has witnessed such a huge increase of education attainment) it is not entirely unthinkable. The macro people had long predicted China's decline since the late 90s.
just to add, the majority of TFP increase will come from technological innovation for which China is far behind the US and from most technological frontiers. It is much easier (so long they have the capital) for Chinese workers to play catch up within the technological frontier than for them to innovate things out of the blue. With that whether they can be 60% as productive as an American worker is anybody's guess. I'd bet on the optimistic side.
At the very micro level, disregard all the talks about technology, capital, and urbanization, if I ask you: will an average high school graduate (China's new generation) be much more productive than an average primary school graduate (China's older generation born in the 70s; not even consider the post-50s and 60s still in the job market)?
Sure. 4% of the total population has a college above education. 60% of the most recent young population (age 22-24) . I think it will be good. I don't think technology innovation will be a mission impossible.
- Chairman MAO said with more knowledge, people will be more reactionary. The younger generation will be more keen to civil rights, freedom of speech, etc. This will potentially cause certain near-term instabilities but will be good for China in the long term.
Many very fair points. To me, China's biggest growth potential lies with its still-to-be urbanized population and human capital. On urbanization, China is now 60% compared to OECD's average 80%. China's higher education obviously isn't world-class and it may never be, but the university graduates do carry way significantly more skills than the previous generation. In TFP terms, a Chinese worker is now about 2/5 as productive as their US counterparts; if you think Chinese workers could reach 3/5 with the increasing human capital, then China still has lots of growth potential to sustain China's rise but not necessarily catching up.
Hi Owen, Thanks for the nice engagement. These discussions are really honing my thoughts as well and I'm grateful for the opportunity to have them. I agree a lot of people have been predicting China's decline since the 90's, both for political reasons (people like Gordon C. Chang who make strong pro-freedom arguments but without an understanding of the underlying economic situation, imo) and economic reasons (lots of free marketeers with no understanding of the ability of government to successfully invest in massive infrastructure projects in developing countries). But I would say, simply dismissing macro arguments doesn't appear to me to be feasible, because even in your thoughts, macro data like urbanization still must be used, so I don't see how we get away from it. We just need to choose the right data, and have the right/best understanding we can.
As you can probably tell from my arguments above, I'd tend to agree with Dan Berg on this one, "urbanization" in and of itself just means people moving from the country to the city, but the decisive question is, what do they do once they get there? Just having people live in closer proximity to one another doesn't automatically create growth, it's a question of what economic activity they do, so the macro data doesn't capture the real situation (as it often doesn't and as you noted).
Gains in education certainly make the population's POTENTIAL much higher, but in an economy where 50% of resources are controlled by the state and deployed very inefficiently at this point (mainly in infrastructure projects), and just 40% of money ends up in private hands (household consumption), the question is will the country be able to USE the great potential of its people. That's precisely the issue, if the CCP actually were to transfer a massive amount of state-owned assets to average people, and dramatically raise incomes, well you would have an absolute boom in demand for education, better (affordable) housing, better food and food safety, better health care, and on and on, and that would provide incredible opportunity for the educated young people (who are ready and raring to go as you noted). In addition, if laws, monopolies, corruption etc were much improved in the poorest rural areas, combined with dramatically growing income, people could urbanize in their booming local areas rather than moving to the top cities (the difference in GDP per capita between the poorest Chinese provinces and the richest is like around 7 I think, where as in the US Mississippi is about only half as poor as the richest state, excluding DC, and that has to do with better institutions in Mississippi as compared to the poorest Chinese provinces, i.e. even the poorest US states still have reasonably uncorrupt government and enforcement of business law).
But with only 50% of the country's resources being used efficiently, and far too high a % of the economic gains going to the government and business and the ultra-rich for savings and investment rather than the average person for consumption for a better basic material life and opportunity and health for their children, the country is massively hamstrung. Sure, migrant workers can go to the cities and get jobs in construction building more needless infrastructure (which is what they do, of course you can be a kuaidi xiaoge, and then a waimai xiaoge, the 50% private is incredibly innovative, but it's crushingly just half the economy or so), which isn't productive so shows up as debt, so debt explodes, and then you need more stimulus for more needless infrastructure, and around and around it goes until the GDP growth target can't be reached anymore and everyone realizes building more is futile and the economy stagnates. That's the basic economic situation, which of course coexists with an innovative and thriving and exploding internet and tech sector, but that is severely limited in its impact by the massive state involvement in the economy and the unequal distribution of final income between gov't/business/the ultra rich saving and the average person consuming.
Thank you David for engaging with me constructively as well. I also learned a lot from your writing. I’d certainly agree that macro structural conditions matter a great deal—my response was a reaction against swinging too far to the macro direction to the extent we ignore the micros—because ultimately it is action (taken by specific individuals) not just conditions (all the structural ones) that propel social change. But if I were to analyze China’s political economy seriously, I’d at least do it in three-levels, namely the structural (demographics, public finance (debt), infrastructure, etc.), the institutional (property rights, IP, private&public economy, etc.) and individual (human capital, work ethics, etc.). All three levels are interlinked and exerting influence on one another. All three are important. I think we often tend to exclusively take a top-down perspective (structural to individual) but dismiss the bottom-up avenue exists (better educated individuals could drive institutional, even structural changes; think of, say, Jack Ma). My comment was meant to push back on that but in no way to reject the other.
I agree with Mr. Peng and Fukuyama that urbanization without industrialization is problematic. The most salient examples are in Africa. People moved to cities en masses and slums emerged as a result. In China’s case, I think the government is aware of the risk and does not want slums to appear in cities. Unlike Africa, they also have the state capacity to regulate the migrant flow and force people out as they deem necessary (“the low end people” in Beijing). But I think rapid mass immigration to cities only happened in a few mega cities; in the rest of China urbanization mostly took place gradually and naturally. Of course, there are exceptions, particularly when the local government wants to grab land from famers for real estate development or to achieve some quick poverty reduction goals (moving people from mountain top to townships). Those people face real problems finding jobs. But overall, I think China’s urbanization proceeded orderly and gradually. That is good because they allow the job markets to develop. More people do create more demands. That is the lump of labor fallacy I warned against. But only if the process happened gradually can labor market develop. You really want the new migrants to mingle and be employed by non-migrants otherwise you risk having a enclave economy like in slums.
I totally agree with the institutions. China needs to improve its institutions to continue to release its people’s potential. Yet institutions can’t get the work done alone and can’t really sustain itself. There are people like Deng and Trump who can change institutions from above and countless policy entrepreneurs at the local and central level (Tightening party control is not gonna help such entrepreneurship for sure). Not to speak of SMEs and middle class that have pushed and will continue to push for better governance and institutions. My point was that if these people become more educated and cosmopolitan-minded, the chances for better institutions will increase.
Better infrastructure, especially of transportation and telecommunication, will facilitate connecting creative minds. China’s e-commerce would not be where it is today without the excellent logistics infrastructure. It may have decreasing returns but overall I believe it is better than debt-sponsored consumption.
The very smart Larry Summers has an interesting answer when asked about building airport in China (cited in full below). The same can be said about industrial policies. Larry's answer is more nuanced than the much-teased popular memes such as "bridge to nowhere" or "picking winners." The problem with reading only macro data and newspaper articles is people may never get to appreciate such nuances.
" You’re a rapidly growing Asian country, and you decide to build an airport somewhere where there aren’t very many people. You do that because it’s going to be cheap to build it now, when there aren’t a lot of people around, and it’s important to establish the land. Then 15 years later, if you’ve grown fast, you’re a brilliant hero of masterful long-term planning, and if you’ve grown slow, you’re an idiot who’s building an airport where nobody wanted to go. It’s hard to know which is the case. The Japanese probably look stupider than they really were because they built in anticipation of more growth than they, in fact, were able to generate. I don’t know quite what’s going to happen with respect to China. It’s not unlike Dulles Airport. Today we think of Dulles Airport as an important strategic stroke that cemented and made possible a hugely vibrant technological economy in Northern Virginia. I’m old enough to remember in the late ’70s or early ’80s when it was a generation after Dulles Airport was built. It was a ridiculous idea, built a million miles from anywhere, and like, “Why did we build that?” So it’s very difficult to judge some of these infrastructure investments except in the very, very long run. Even when you judge them in the very, very long run, you can make a judgment ex post as to whether they were a good idea, but even then, it’s going to be even more difficult to make a judgment about whether they were ex ante sensible or ex ante not sensible"
Hey Owen, Good stuff. Like the tripartite framework (structural, institutional, individual), and totally agree of course about the importance of individual initiative writ large, and the importance of IP protection and the institutional factors. China has all these going and more, which is why I've come around to the view that in the area of leading tech, their system will continue to be a real competitor despite the ban on critical thinking in many areas because within the physical sciences, independent research is allowed, and in that area of the economy (tech), it's private, until the company gets so big that it must start taking macro political orders from BJ (on things like censorship, backdoors etc, but those don't affect the company's R&D ability it seems, at least insofar as it doesn't seem necessary to have the absolute leading creative minds which are still concentrated in American universities to get ahead in AI or at least stay close). What's your view on that? I personally used to think they would always be behind--I had a friend who was super high up at Ford China around 2010 and he told me his sense was that the CCP had basically given up on trying to produce their own world class cars because their engineers just couldn't quite think creatively enough or collaboratively enough to really get there, which to me implied a fundamental defect in the authoritarian education system, but that seems less of an issue in tech, or maybe as Kai-fu Lee said in AI Superpowers, the future of AI is more data plus decent algorithms not less data plus better algorithms so even above average programmers rather than elite ones will be good enough to stay ahead of the US.
But back to the economy as a whole, to me this is where the structural part becomes the dominant factor--if 60% of your resources aren't ending up in the hands of households, but are mainly being invested in infrastructure (even the "massive" investment in tech R&D is still only a tiny fraction of overall investment spending in China as it necessarily must be since it employs a tiny fraction of people), the impact of the structural and individual forces will necessarily be more limited relative to the macro/infrastructure factor (just as a matter of arithmetic).
And of course this assumes that it is correct to say that infrastructure spending has become unproductive in China, you brought in the nice quote from Larry Summers, and I would say that there IS one hard constraint on the ability of a country to just build unlimited amounts of infrastructure and say that at some point in the future, however distant, it will be useful, and that is debt, that is, if the infrastructure is not productive currently, it won't pay for itself, it won't provide additional value to the economy for the time being, so the debt used to create it (it is financed via loans from banks to SOE's) cannot be repaid, so overall debt in the economy increases, and as I mentioned in a previous post, if you're at 100 units of GDP and build 10% growth infrastructure (as a simple example) to get to 110, but the new 10 isn't actually productive (but is not written down since SOE's aren't allowed to go bankrupt), and then you want to grow 10% again the next year (as the CCP does since it gives out growth targets with the exception of this Covid year of course so far) to get to 121, you're really going from 100 to 121, and eventually the gap gets too big to make up for, so growth collapses and it becomes clear GDP was inflated. This is what happened to Japan, which had an identical growth model to China just less extreme in terms of suppressing consumption, Japan was 19% of global GDP in 1989 and just 6% now (a much greater decline than either the EU or US had so it's not just a matter of China claiming a greater share), and has grown at 0.5% a year since then, so that presages a pretty dismal future for China if significant rebalancing doesn't occur as I've been pointing out, even if that coexists with a dynamic tech and private sector in that areas of the economy, just as Japan has a thriving tech and entertainment sector and unique and awesome culture among the citizens/private sector even as the gov't/public sector hasn't really delivered the way it should have over the past generation plus.
Hi David,
Many great points. Let me start by saying a few extra words about the three levels. It would be nice to have all three develop at the same but in reality that is hardly the case nor is it absolutely necessary. China in the 1980s had almost none of three (well, except the demographics was good). Huang Yasheng argues that the Chinese economy took off in spite of not because of good infrastructure. The institutions then were also pretty bad (right after Cultural Revolution) but some small positive changes (mainly in the rural area) were enough to kickstart the economic boom. As China accumulated more capital they started to build more infrastructures, mainly in the 2000s. Then you see an upgrading of manufacture in a few clusters of the country as well as e-commerce and other service sectors (remain unproductive and underdeveloped because of low consumption rate, more on this part below). Many foreign companies don’t want to relocate out of China today because of the decent infrastructure and more developed supply chain (I study Southeast Asia. I know precisely this is a big missing piece there). But it is not true China started to develop because of infrastructure. When Chinese leaders go around selling the BRIs they often confuse (maybe on purpose) the chicken and the egg. Dani Rodrik says development is like jumping hoops. You jump to the next one after you finish the last one. Constant problem solving is the key not some grand ex ante ideal macro plans because things change so fast. The macro conditions were never so great. Political economists only developed “developmental state” concept ex post the Asian Tigers have already succeeded. Humility is very important.
Obviously, you can’t keep building infrastructure to make your economy grow (or worse, to make figures look good) as you very well said “from 100 to 121”. Justin Yifu Lin praises the capital invested in infrastructure as “patient capital” because it does not request immediate pay-off. He has a good point. The kind of “patient capital” is what private investors are not willing to provide to the developing countries. However, it is a completely different story if that patient capital becomes dead capital that never pays off on its own or create enough externalities to contribute to the economy as a whole. Basically, that becomes consumption not investment anymore. Debt-sponsored consumption is not sustainable (has been the case in the U.S.) especially for developing countries. When Chinese government keeps building more and more infrastructure, I see path dependence (because it had worked!) and problems (you and many others have pointed out) at the same time. But what Larry’s quote reminds us is that we should pay more attention to which infrastructure projects get built rather than “whether China as a whole should build more infrastructure.” I personally would classify public health facilities and sports facilities (not huge stadiums, but those that can be used by ordinary people at reasonable price and with good maintenance) as infrastructure. I see no problem even if they debt-finance such infrastructures because the externalities are huge. They also create more sustainable jobs. Long-term life guards as opposed to one-off construction team.
One small point I want to contest is the categorization of real estate as investment. To me, household buying apartments is at least half- consumption and half-investment (especially in China it’s a lease basically). Under the standard categorization they’re only counted as investment. So, when people say Chinese economy have very low consumption rate I always ask them to look critically at the data. Admittedly, I’m a minority on this.
I don’t know enough about the high-tech sector to comment. But overall, I agree with you China is not capable to compete with the US in cutting edge technologies. Most industries in China are far from the technological frontier. To sustain productivity/economic growth China only adopting mature technologies that is more than enough. They can do that with capital investment and here a well-educated workforce to use those technologies would be critical.
I’d make a controversial argument that not having cutting edge technologies is not a big deal. What cutting edge technology does Taiwan, Malaysia and Eastern European countries have? Well Taiwan may have a few now after they’re already twice China’s GDP per capita (in nominal terms); but during its boom years you don’t see as many Zaibatsu or Chaebols in Taiwan. They didn’t have MITI (high competent bureaucrats) and made many stupid mistakes (the wasted money in shipbuilding industry). Those countries all have higher GDP per capita than China. China can keep growing if it can mimic those countries. I find it very annoying many of my fellow Chinese like to compare ourselves to the US. There is not much to compare. Unless miracle happens China would no way catch up with Japan or US in this century but it does not mean Chinese economy could not advance to the level of Malaysia, Poland and Chile. You don’t need to get everything right to get there. Those countries themselves didn’t. Having revealed my nationality, I’ll stop here.
agree; and Japan did not have an unemployment problem; began with a much higher standard of living.
Great Analysis! I read Fukuyama's book on Greece, he also mentioned urbanization without proper industrialization will usually lead to stagnation and political decay. Things will go worse if poor provinces don't enhance business friendly environment, since the central government is subsidizing these provinces and the urbanization there will look more like Greece or Southern Italy. Local officials get lazier and more corrupt by distributing the free subsidies or relentlessly raise debt.
- Maybe some of the westward development policies are encouraging these provinces to nurture more meaningful export oriented manufacturing businesses. But again this goes back to your earlier comment on exporting to a poor neighboring country will make no sense at all.
- Enriching the laobaixing ( Bannon is using this term very often :-)
-- I wouldn't entirely agree that CCP cadres are just greedy m*f*ers. They are gradually transferring SOE assets or their profits to fund the retirement fund and healthcare insurances.
-- Split the SOE and give each citizen a fraction. This is discussed quite vividly in 80-90s, which to my understanding is one of the suggestions in Washington Consensus. CCP may think that didn't work really well in Russia/Eastern Bloc post USSR. Part of those fractions was somehow purchased by Tycoons at very low price. Or is this just a misinformation campaign by CCP? Never got a chance to study well.
----- This can be better executed now with 2020s tech. Maybe every citizen can get a digital currency wallet and contains a piece of SOE stock portfolio and no super rich can exploit them easily? But if they can't sell it immediately that is quite similar to gradually transfer those to pension accounts.
- In all, am still a bit confused by how to effectively dissolve these SOE assets. They are huge. Maybe sell it to private owners by auction and then distribute the cash to 1.4 billion LBX? It will be about 10,000 USD for each citizen using 2018 National Assets Report (to the NPC) number.
The proper way to effect the transfer of state-owned assets is a great question, and one I haven't looked at myself as much because I had to spend so much time and intellectual energy just getting to the understanding that that was probably what was needed. Obviously the 1990's Russian strategy was terrible and the neoliberal/Washington Consensus idiotic MBA professor economics types doing the advising were incredibly disingenuous and, in the end, dumb. But that doesn't change the fact that infrastructure investment in China currently is an inefficient use of resources and that therefore those resources need to be redeployed if we are going to avoid stagnation.
I'd suggest taking a look at "Avoiding the Fall" by Michael Pettis, he talks a bit about these issues. I'll have to go back and look and see if he goes into any strategies for wealth transfers, I forget. I also recommend taking a look at the works of Minxin Pei (for the logic of political reform) and Huang Yasheng (for the tragedy of rural development in Chins since Tiananmen).
scattered thoughts: Chinese population = approximately Japan + Canada + US + Mexico + all central and South America + Europe. So obviously what happens in or to China matters. But all of these people live in livable space 1/2 the size of US - so there's not enough. Period.
Not enough: space,air, water, food,jobs . . . None of this is going to change. In his history of China Klaus Muhlhahn (Making China Modern) makes the point that China really hasnt changed that much since 1644 and, I would add, is probably not going to change any time soon. The West has been trying unsuccessfully for 150 (?) years to change them into Christians or democrats. Chinese are very much like Americans; comfortable in their continental sized country; similiar sense of humor; justly proud of a rich heritage, but stuck with an abominable CCP. If the latter were to somehow disappear and some reasonable regime were to appear, China would indeed become a superpower. If not, China will continue on with ever slowing growth and suffer the consequences.
Good view point. Geography and natural resources do have great impact on a nation. That kinda explains why Chinese tend to work harder than normal, kinda obsessed with 'development', and the competition inside China is more fierce than it should be. There is an 'involution' theory summarizing over population society, it sometimes leads to oppressive social structure. India/China has basically same population and same farmable lands (1.6/1.4 m sq. km.). Traditionally the social structure are both quite oppressive I would say. (Caste/ Gentrified - Landlords)
- Regime change. I need more knowledge. Maybe India is a good example. We should learn more about her reform and progress.
- Christianization. Korea seems doing OK, right? And Taiwan. I think both have strong Christian presence. Chiang-Kai-Shek was converted in his late 30s I think. But, again, competition in China is too much, sometimes the fight is very dirty, especially for politicians.
- Thanks for the Book recommendation. Pre-ordered on Amazon and found some youtube lectures by the author.
- QING Emperors set a high standard in 1700s and left many legacies.
- There was a very close Britain-like revolution in 1900s, but the Empress died in a sudden. Everything blows up : at least 1 warlord emerged in every f*king province, and Russia/Japan can't let us go.
- Looking back, so many accidental events twisted the probably way better version of China.
I would add: when Nixon and Kissenger met Mao and were gushing about how he had "revolutionized" China, Mao replied that really not much had changed. They of course thought he was being coy. But I think he knew he had changed nothing. His attempts later on to REALLY change China were of course disastrous and China then reverted back to the norm.
Think they met in 1972? Mao failed to pick the right successor. Utmost failure for traditional Chinese emperors. Should learn from Emperor Kangxi and pick the prince with the most contradictory policy tendency then himself so the country can rebalance quicker. If DENG were not overthrown in April 1976, CHEN clan won’t have that much weight and China might already be democratized in 1989.
Chen clan?
CHEN Yun and his pupils. Hard core soviet. He and three of his pupils out voted the reformists and made the Tiananmen decision on May 17. Should Mao explicitly chose DENG as successor and stick with it, Chen would have way less political impact. His support for DENG was decisive to out vote the formal successor HUA in 1980. HUA is politically one generation younger. It’s quite similar to early MING dynasty politics. DENG would have four more years and tighter grip in CCP, he is more inclined to support the reformist politicians. And Mao’s wife may survive politically since DENG have way stronger ties with military and won’t feel that threatened.
On a completely unrelated topic: is China once again shooting itself in the foot? With rising global food prices + China imports 80% of its food: raising tarrifs on Australian products and telling SOEs not to buy American soybeans and pork.
FMA spokesman denied. USSEC china rep denied.
I would prefer any Reuters report starting with 'sources say' 70+% possibility fake news.
- in Xi time, or after 2016, there is evidently less 'official leakages' than before. There is now no meaningful opposition party factions. They won't use tips for HK media or western media as a political weapon when it use to be in 1980s-2010s.
- When Reuters or other western news agency use 'people close to XX department' or 'unnamed XX official' would be more credible than 'sources'. I think sometimes they are just using un-vetted weibo contents.
- Trade deal is probably the only thing left in China-US relations. I think CCP will hold their end of deal.
China imports 80% of its foods? Can you prove this?
Ding Kang PENGjust now
I will need more information to comment. April import number looks normal . The report on soybean halt seems only from Reuters.
Thank you for the instructions. Will read through.
I've never understood the continuing urbanization argument; another 200-300 million poorly educated people wander into the cities - and do what? That's assuming the hukuo system is abolished - which I dont think is going to happen. How would they go about raising workers' productivity 20%? How long would that take? Sounds like a good idea - why dont we (and everybody do that?
It almost has nothing to do with Hukou. Urban Hukou is only 40% now but urbanization is already 60%. I'd suggest you look at the micro-level because macro only can tell you so much: consumption, investment, government spending, exports... it's static and boring. I've worked with many migrant children and in cities and in rural areas, the strong urge of rural youth to go to cities is what may continue to drive urbanization. Please don't fall to the lump of labor fallacy. As for worker's productivity, again, with more human capital of at the individual level (not "everybody" has witnessed such a huge increase of education attainment) it is not entirely unthinkable. The macro people had long predicted China's decline since the late 90s.
just to add, the majority of TFP increase will come from technological innovation for which China is far behind the US and from most technological frontiers. It is much easier (so long they have the capital) for Chinese workers to play catch up within the technological frontier than for them to innovate things out of the blue. With that whether they can be 60% as productive as an American worker is anybody's guess. I'd bet on the optimistic side.
At the very micro level, disregard all the talks about technology, capital, and urbanization, if I ask you: will an average high school graduate (China's new generation) be much more productive than an average primary school graduate (China's older generation born in the 70s; not even consider the post-50s and 60s still in the job market)?
Sure. 4% of the total population has a college above education. 60% of the most recent young population (age 22-24) . I think it will be good. I don't think technology innovation will be a mission impossible.
- Chairman MAO said with more knowledge, people will be more reactionary. The younger generation will be more keen to civil rights, freedom of speech, etc. This will potentially cause certain near-term instabilities but will be good for China in the long term.