Why Am I Skeptical Of Chinese Economic Power?

by Pejman Yousefzadeh on January 19, 2011

Ryan Avent explains:

. . . Let’s step back for a moment. China has an enormous population and so it naturally has an enormous economy. But in per capita terms it remains poor. China’s per capita GDP is in roughly the neighbourhood that includes Iran, Ecuador, El Salvador, Thailand, and Algeria. That’s after thirty years of rapid growth.

For all its macroeconomic managerial prowess, economists have grown concerned about the sustainability of the Chinese catch-up machine. It holds enormous reserves of a currency that will almost certainly lose value. Its efforts to control investment and inflation have led to a highly repressed financial system that has almost certainly wasted billions of dollars on crummy investments. Household consumption in China is unsustainably low, and its economy is unsustainably dependent on both exports and public-led investments in infrastructure. Unlike some others, I don’t think China will face economic disaster as it navigates its way through these challenges. But I do think it will be difficult to handle them and maintain the near-10% growth rate it has lately enjoyed.

And that’s a problem because there are more hurdles right down the road. An aging population will begin to weigh on the economy while the median income remains a quarter of the American level. China may find, like so many catch-up economies before it, that once technology transfer has run its course and the initial boom is over it lacks the innovative capacity to continue growing at a healthy 3% clip. And then there are environmental concerns, likely problems posed by disgruntled minorities or class groups in an increasingly unequal China, and the inevitable busts to come. How will the government cope?

Note that Avent’s piece is in response to the likes of Francis Fukuyama, and Steven Pearlstein, each of whom appears to have contracted a severe case of Thomas Friedmanitis.

Previous post:

Next post: