China prognostications

Via Marginal Revolution, we find that Nobel Prize-winning economic historian Robert Fogel is almost eye-poppingly bullish on China:

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the output of the entire globe in the year 2000, despite the influence of several potential political and economic constraints. India's economy will also continue to grow, although significant constraints (both political and economic) will keep it from reaching China's levels. The projected decline of the EU15's global share of GDP means that Asia will be poised to take up the role of promoting liberal democracy across the globe.

Wow.

Those economic projections are straight-line projections based on January rates of growth. If those rates hold steady for the next 33 years, the average Chinese person will be 25% richer than the average American. Given China's enormous population (20% of the world at present), that would easily give China the largest share of world GDP of any country in history. Robert Fogel must be a damn good economic historian, because a transformation of that magnitude would be unprecedented in human history.

But what really made my eyes go wide is the prediction that Asia will "take up the role of promoting liberal democracy across the globe." I'd like to know the model he used to come up with that one.

Seriously. The most brilliant economist in the world could not predict whether China will become a liberal democracy. It seems like some people believe what economists spout off about any and all topics, but most of the time this is just as silly as trusting shamans, astrologers, or Thomas Friedman. My advice: don't. The scope of economic theory is fairly wide...but it's not that wide!

Meanwhile, Tyler Cowen takes the opposite position from Fogel:

How long will it take before China cracks up?...[H]ow about a bone-crunching, bubble-bursting, no soft landing, Chinese auto crash-style depression within the next seven years?...If you are not convinced, raise your right hand and repeat after me: "China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn't even brush his teeth, and now they will go from rags to riches without even a business cycle burp." I don't think you can do it with a straight face.

This is a still an extremely bold prediction (Did he really say "seven years"??), but much more economic and less political than Fogel's vision of a Chinese democracy crusade.

But basically, what each of these economists is doing is tossing out off-the-cuff guesses about where China's headed. It's the "Ooooh, China big and pretty" instinct vs. the "Eww, Mao didn't brush his teeth" instinct. Neither one is particularly grounded in economic theory, although Cowen's (ironically) has a little more historical weight behind it. So here's some more, equally valid, predictions from the Marginal Revolution commenters:

I always confuse intensive with extensive development. China has heretofore almost exclusively done the one that involves importing technology made elsewhere, rather than inventing new stuff. There's a plateau of wealth that can't be crossed unless you're inventing new stuff--on the other hand, if you're inventing new stuff enough you tend to cross that plateau rapidly.

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Those on the wildly bullish camp - Chinese Economy To The Moon! - hardly ever seem to consider how rapidly China ages over the upcoming decades. It seems the country is in a race to become advanced enough, productive enough, and healthy enough to afford the inevitable and otherwise crushing health and social costs. Demographics will be a large challenge ... that is until it adopts and enforces a "one granparent" policy.

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The current China boom is nothing but vendor financing fraud on a Brobdingnagian scale. Just as the managements of Nortel and Lucent made them appear to be great successes during the telecom bubble by lending the money to buy their output to customers lacking any real ability ever to repay, so does the Chinese elite make China appear a great success by lending us the money to buy their exports, though we can never repay by exporting to them goods and services of equivalent value. As China is a totalitarian country, this fraud will continue until the stresses it will inevitably generate cause the system to break in some very spectacular way.

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China's 20th-century history is that of a power vacuum, and the violent successive attempts to fill it. The Communists did what their predecessors did not, namely, successfully pass the regime off the next generation...Looking at the past history of revolutions, there seems to be a crisis after 25-ish years associated with the succession. A system that survives that faces its next crisis after another 50-ish years, about the time that the revolution is passing from living memory. I think the events of 1978 and the successes of the reformed Communist system have bought the current government legitimacy until around 2025-2030.

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Wouldn't the Japanese model seem the most likely for China in the long run -- catch up with the Western Europeans in per capita income, then hit a ceiling?

And there you have it, folks. The future of China, in a nutshell.

Just for fun, want to see my prediction?

From a recent email to a friend:

Expect China's runaway growth to continue for 10-13 years, whether or not the yuan appreciates. Expect cracks in the facade, as the U.S. cannot continue to ramp up its buying of Chinese goods, as Democrats crack down on the deficit (putting pressure on the yuan), as China's working-age population peaks, as China's society ages rapidly starting in 5 years, as the supply of educated labor from the countryside dries up, as India and Vietnam become more competitive, as China's water resources become strained, and as global oil supply peaks. Even combined, these factors should only be ably to mildly slow China's growth in the next decade-plus; in fact, rapid yuan appreciation will at least double China's nominal GDP. But in the late 2010s or late 2020s, a tipping point will be reached, and China's economic engine will experience its first recession. At that point, a number of inefficiencies in the system, frozen in by years of seemingly neverending massive growth, will become apparent - corruption, weak corporate management, misallocation of resources, agricultural inefficiency, etc. These inefficiencies will take a number of years of low growth to "work out," at which point China should either A) collapse in a spasm of violence, B) sink into semipermanent stagnation, or C) reform its legal, corporate, educational, financial, agricultural, and political systems to become a sustainable developed country that grows at a more measured pace. My guess is (C), but you never know.