June 03, 2010

Matthew Yglesias on China's Future Growth and Krugman on Singapore and China

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Analysis of technological progress in China and India by Peilei Fan (UN study 2008)

Matthew Yglesias at ThinkProgress wrote about China's economy and indicates that he believes that almost all of China's gains have come from shifting from low efficiency agriculture to high efficiency industry. Matthew predicts that this will continue but that China's growth will slow down dramatically well before China becomes as rich as even the poorer developed countries.

Matthew talks about China being quite a bit poorer than Costa Rica or Bulgaria on a per capita GDP basis whether you go by nominal or PPP-adjusted GDP. China is poorer than those countries now but Matthew seems to be saying that China will not catch up to them on a per capita basis.

Definitely Matthew is predicting that China will not catch up to or even get close to Barbados or Portugal on a per capita basis. The definition and list of developed countries has Barbados and Portugal as the poorest. 2010 PPP GDP per Capita Estimates

The IMF esimates of PPP GDP per capita for 2010

China          $7240
Costa Rica $10687
Bulgaria $12077
Portugal $22027
Barbados $18110
Matthew Yglesias says China slows down well before or a lot less. Say 80% or less of Barbados $15000 ish ?
Singapore $52964 (remember this when you read the review of Krugman's prediction for Singapore and what he calls the paper Tiger economies)
Taiwan $33831
South Korea $29351
Hong Kong $44840
United States $47702

On a nominal basis Barbados has $13,000 GDP per capita and China has about $4000 If China does catch up to Barbados on a per capita basis then China has an overall economy of about $18 trillion which if that happened before 2020 probably catches the US for overall economic size on a nominal basis.

China does have the shift to higher productivity industry but is also developing world class science (look at patents and scientific papers). China is increasing productivity in agriculture and industry. China is developing car manufacturing and car markets. China is moving up to regional jets. China is moving on supercomputers.

I predict that China will fully catch up on a per capita basis. China will have more than 80% of Barbados or Portugal per capita GDP before 2020. China will have per capita GDP in the range of the top 30 countries (Spain) by 2045 and to USA levels by 2060.

Reviewing Krugman's Myth of Asia's Miracle

Matthew Yglesias feels that Krugman's paper is the touchstone for understanding China's medium term economic prospects. Let us review that paper.

Krugman predicted Singapore would not have growth rates like they had from 1966-1990

Consider, in particular, the case of Singapore. Between 1966 and 1990, the Singaporean economy grew a remarkable 8.5 percent per annum, three times as fast as the United States; per capita income grew at a 6.6 percent rate, roughly doubling every decade. This achievement seems to be a kind of economic miracle. But the miracle turns out to have been based on perspiration rather than inspiration: Singapore grew through a mobilization of resources that would have done Stalin proud. The employed share of the population surged from 27 to 51 percent. The educational standards of that work force were dramatically upgraded: while in 1966 more than half the workers had no formal education at all, by 1990 two-thirds had completed secondary education. Above all, the country had made an awesome investment in physical capital: investment as a share of output rose from 11 to more than 40 percent.

Even without going through the formal exercise of growth accounting, these numbers should make it obvious that Singapore's growth has been based largely on one-time changes in behavior that cannot be repeated. Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated work force has been replaced by one in which the bulk of workers has high school diplomas; it is unlikely that a generation from now most Singaporeans will have Ph.D's. And an investment share of 40 percent is amazingly high by any standard; a share of 7O percent would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve future growth rates comparable to those of the past.

Singapore has gone through some booms and busts but has had thirteen years of 7-11% GDP growth and 6 years of bad growth (-3 to 4% years) and two years of 6-6.5% growth for the 1990-2010 period.. This year looks like another 8% GDP Growth year. Singapore averaged about 6% GDP growth from 1990-2010. I would say that Krugman was clearly wrong about Singapore's GDP growth prospects from 1990-2010.

The World Bank estimates that the Chinese economy is currently about 40 percent as large as that of the United States. Suppose that the U.S. economy continues to grow at 2.5 percent each year. If China can continue to grow at 10 percent annually, by the year 2010 its economy will be a third larger than ours. But if Chinese growth is only a more realistic 7 percent, Its GDP Will be only 82 percent of that of the United States.

The US had 4% growth from 1990-2000 and about 2.5% growth from 2001-2010 According to purchasing power parity estimates for china and the USA for 2010, the GDP ratio is 66%. But this is after a 40% reduction in China's PPP back in 2008. Using the old PPP China would be at 92% of the US GDP. The USA grew about 10% faster than the Krugman ballparking. China's GDP growth has mostly remained in the 8-10% per year level from 1994-2010.

Krugman was right that Japan would hit an economic wall but I don't think he got that prediction right for the right reasons.

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