Some time in the future, the economy of China will surpass that of the United States. No one knows exactly when, since projecting growth rates decades into the future is risky. But it may not happen as soon as some people think.
Just as in hiking through snow or jungle, it is easier to go fast if someone else is breaking the trail. But it becomes harder when you have to break it yourself. Keep that in mind when reading forecasts of China dominating the 21st century.
This is not to downplay the growing economic importance of China or its remarkable growth over the past three decades. In the 26 years from 1978 to 2004, the value of Chinese output grew by a factor of 10. That is more than 9 percent a year. In terms of the number of people benefiting, in no other period of human history did as many people rise out of poverty in such a short period.
That does not mean, however, that China will keep growing uninterruptedly at the same pace for another 26 years. It is relatively easy to get large percentage increases from a very small base, at least at first. And the 1978 base of Chinese gross domestic product and per-capita income was low indeed. Even after growing 10 times over, Chinese per-capita income is one-eighth that of Americans. (In all such comparisons between countries, the question of which exchange rate you use has great influence on the results you get, so don’t rely on calculations being stated with great precision.)
At the death of Mao Zedong in 1976, China was one of the most stupidly managed economies in the world. Simply stopping doing stupid things was enough to touch off a growth spurt.
Moreover, technology in Chinese industry and agriculture lagged that of wealthier industrialized countries. Simply adopting existing technology already used elsewhere was an easy source of growth, one that is not yet played through to its end. Again, the percentage gains from such technology adoption are large if one starts from a very small base.
But the closer a nation gets to the leading countries in terms of per-capita output, the harder large increases become.
In a recent essay, Harvard historian Niall Ferguson noted that in the seven decades from 1830 to 1900, Britain’s output increased a mere fourfold, compared with China’s recent tenfold burst.
Yes, the average annual percentage increase for China is more than four times as great.
But there was a crucial difference. Britain was the world leader in terms of technology in that era. It could not copy from anyone else. British producers applied existing technology efficiently. So growth in per-capita output had to come from more capital or from developing even better technology. That is far more difficult than buying or pirating ideas and machines already developed in other countries.
Yes, China is doing more research and development. Yes, China is cranking out hundreds of thousands of engineers and scientists. Yes, China is likely to take a greater role in total global technology development.
But it is extremely difficult to maintain the same rate of growth under such conditions than when growth comes from putting existing hardware in the hands of workers.
As the technology gap narrows, the importance of legal and political institutions grows. That is China’s Achilles’ heel. It is becoming an industrial giant, but it lags far behind even India, Taiwan or South Korea in democracy and the rule of law. As China grows, this aspect of its underdevelopment will increasingly hamper its overall economic growth. Eventually, China may well be the world’s largest economy. But don’t count on annual growth of 7 percent or more continuing indefinitely.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.