My Blog

May 27, 2008

Although China’s growth has been pretty spectacular during the past few decades, I have often heard it argued that a significant source of growth has simply been the unwinding of many decades of economic mismanagement.  In order to test this I went onto Angus Maddison’s magnificent website where he tries to calculate real GDP (on a PPP basis), population and per capita GDP for every country over the past 2000 years until the year 2003.  Obviously this is an immensely difficult thing to do, and there are large gaps in his data, but his is the most complete data set I know.

The graph below lists China’s per capita GDP as a share of that of what I think to be the four most culturally comparable countries or provinces – Japan, South Korea, Taiwan and Hong Kong.  As the graph seems to indicate, during the first three decades after 1949 China’s economy slid very rapidly relative to its neighbors, and in the subsequent three decades it began to long process of narrowing the gap. 

In 1929, China’s per capita income, for example, was roughly 30% of that of Japan.  By 1949 it had declined to 23% of Japan’s as China suffered the depredations first of war with Japan and then civil war between the Nationalists and the Communists. 

After the war years things got relatively worse as China’s neighbors enjoyed growth rates far in excess of anything China could muster.  Of course per capita incomes in China did slowly increase during most of those years, but not nearly as fast as Japan’s or most of China’s other non-socialist neighbors.  As a consequence Chinese incomes began a rapid relative decline, so that by the mid-1970s Chinese earned about 9% of what their Japanese counterparts earned.  Since then China has experienced an equally rapid climb back to 23% of Japanese per capital income by 2003, although much of that relative growth occurred during the stagnant Japanese decade of the 1990s.  Maddison does not have figures for Hong Kong before 1949, but after that year Hong Kong incomes track Japanese incomes fairly closely.

The relative numbers are more dramatic, not surprisingly, for the two poorer comparable counties.  For much of the first half of the 20th century Taiwanese and South Koreans earned roughly twice what their Chinese counterparts earned.  Beginning in the early 1950s as Korea and Taiwan took off and as China stagnated, the income of the average Chinese sank to 25% of the average Korean and 18% of the average Taiwanese, before Chinese incomes began recovering slowly in relative terms in the late 1970s.  As of Maddison’s latest numbers (the year 2003), Chinese earn a little less than a third of what their counterparts in Taiwan and Korea do.  China still has a long way to go before returning to its average relative position in the first half of the 20th Century, but it has clearly turned the corner.

The conclusion from the first graph is that in spite of the tremendous catching-up that has taken place in the past three decades, China has still lost ground.  It is still far behind its position relative to its neighbors at the beginning of the six decades since 1949.  That might suggest that indeed much of China’s recent growth boom may simply be the consequence of unwinding two decades of severe economic mismanagement

But that conclusion is not necessarily fair.  Japan, South Korea, Taiwan and Hong Kong are among the best performers among China’s neighbors.  For some reason I can't put more than one graph on this site, so I cannot show it graphically  but on my worksheet I charted China’s change in per capita income relative to that of four other large and less successful Asian neighbors -- Malaysia, Thailand, Indonesia and the Philippines. 

The story here is much more mixed.  Their own political and social problems after the Second World War meant that economic stagnation in those countries matched that of China, until the 1960s when all four countries began widening their gap with China.   By the early 1980s however, China had recovered much of the lost ground with Thailand and Malaysia so that the average Chinese was once again earning around 60% of what his counterpart in those two countries earned -- China's per capita income was broadly 60% of theirs both before 1949 and after 2003. 

Although China has just caught up with those two (in relative terms), it has more than done so with Indonesia and the Philippines.  From roughly 20% below in the late 1940s and early 1950s, Chinese per capita income lost ground in relative terms until the late 1970s and early 1980s, but thereafter grew so rapidly in relative terms that in recent years Chinese per capita income has significantly surpassed that of Indonesia and the Philippines (140% and 190%, respectively). 

The experience of China relative to these two countries makes it harder to argue that China is simply recovering some of the ground it lost during the disastrous first two decades after 1949, although of course both of these countries have had very difficult economic histories themselves, and tracking the performance of China against these two does not lead to any obvious conclusions about the reasons for Chinese outperformance.

The real question of course is whether China can keep up these growth rates and eventually make up for all of the ground it lost relative to a wider group of its neighbors.  I have not had the time or resources to check the dependency ratios in these eight countries and provinces, so a straight comparison of per capital growth rates between them may conceal a lot.  Remember, as I discussed two weeks ago (“Demographic projections and trade implications”), China switched from having a rapidly deteriorating dependency ratio during the first two-and-a-half decades after 1949 to a rapidly improving dependency ration since then.  After 2010-2015 conditions will change again, and China’s dependency ratio begins to deteriorate quite dramatically.  All of this necessarily affects per capita income growth.

Comments (15) for "China's relative economic gr...

The dependency ratio will surely affect the GDP per capita, but there other ways of sustaining the GDP growth. China's Gross Domestic Expenditure on R&D (GERD) as a percentage of GDP of 1.34 % (2005) is now close to that of the Czech Republic 1.42 %(2005). (Main Science and Technology Indicators OECD 2007). There is a massive investment in R&D, something that was missing in the last 30 years. The number of Chinese triadic patent families was 433 compared to Israel’s 395 (2006) and Japans 15 239 (2005), which shows that the investment in R&D is still very new, but it is a start. The R&D investment is also one of the main elements in CCP’s ideological base. In the Chinese GERD the business enterprise sector is performing 68.3 % of the R&D (2006), this is very good news for the GDP as a whole. The Chinese R&D might be somewhat differently composed then in other countries with state R&D unites being privatized in 2002, and the many design patents in the Chinese patent statistics added together with the low number of triadic patent families show that there is still some way to go, but all in all a lot better then ever before. I think the Chinese economy still has not harvested the fruits of its massive investment in R&D. The last 30 year have been a jump from low tech to medium tech industries, there seems to be little that can get in the way of a move from medium to high tech. I will agree that the dangers of a rapidly deteriorating dependency must be mentioned and evaluated, especially if, as we discussed earlier, there is a lower retirement age then first assumed. I would also still argue for a 2 or 3 child policy in light of the need to even out the drop in young dependent after 1980. One worry I have is that the service sector does not seem to be growing at the same rate as the modern industry sector; it would seem that the decline in agriculture as part of the composition of gross value added is absorbed by the industry and not the service sector. This is of course logical, but the transition from industry to service sector has still not kicked in. My point being that the GDP growth seems to be sustained in a R&D investment and a raise in the high tech industry, but not in the service industry. By anders - 5/27/2008 12:09 AM

'the four most culturally comparable countries or provinces – Japan, South Korea, Taiwan and Hong Kong'. Hong Kong is a Special Administartive Region and of course, South Korea and Taiwan are countries. Are you implying that Japan is a province?? By Gerry - 5/27/2008 12:19 AM

Thanks for your interesting article. I think among all neighbors of China, India is the one with which the comparison makes most sense. Both are big countries, with much more people than other countries. And I believe that big countries, like big companies, operates somehow differently, to their smaller counterparts. By Shiwen - 5/27/2008 3:06 AM

Gerry: Taiwan is deemed as a province of China by most Chinese, and most countries officially acknowledge China's stance toward Taiwan. By Shiwen - 5/27/2008 3:09 AM

"Hong Kong is a Special Administartive Region and of course, South Korea and Taiwan are countries. Are you implying that Japan is a province??" Japan is a country. No matter how provincial in some respects. Also, South Korea is still half a country, after so many years. And, Taiwan is still in the offing as to whether or not it is a country. No one knows, yet. Hong Kong is now an SAR. No matter that most people there might wish this fact to be untrue. By GerryMinder - 5/27/2008 3:23 AM

It's also interesting to go back and look at growth rates over the last 200 years. China is not merely recovering from a bad two decades, but a bad century and a half. I don't think that Japan is particularly culturally comparable to China. In any case, Japan's growth trajectory is quite different since most of the industrialization in Japan occurred in the 19th and early 20th century, and Japan's expansion post-WWII was like Germany's largely a matter of recovery rather than new industrialization. Also it is interesting that all of the situations where there was economic stagnation have names associated with them. Mao, Marcos, and Suharto. By Twofish - 5/27/2008 4:02 AM

that rogoff and reinhart is sure full of great references ;) what i find interesting in maddison & wu paper (http://www.ggdc.net/maddison/articles/China_Maddison_Wu_22_Feb_07.pdf) is the 2nd chart on page 8. these guys recalculated chinese gdp, and the interest bit for me is growth for the past 10 years. Wu shows recession for 98 and around 02, which is confirmed by other stats like electricity, coal and ore consumptions, and of course, completely absent from the Chinese stats. still I think Maddison is too big a China fan. he thinks that China is >already< the biggest economy in the world (which would explain third-half of the world's resources but only 8% GDP phenomenon). unfortunately, i think PPP adj GDP is as poor measure of economy as GDP. I live in london now, and a single trip on tube costs 4 pounds, with long cues everywhere and massive delays all the time. now a trip on the tube in tokyo would cost about 140yen (about 70p), and ALWAYS on time. yet the difference between GDP adjustments in PPP and nominal terms for Japan and UK is only 10%. my personal experience is always different from the PPP. I think Shanghai/Beijing/Shenzhen are not that cheap if you come on a business trip or try to open a company in an A class office and hire locals. even if you go to the deepest province, yes things are cheap, but even a province like Guizhou a bowl of rice is RMB2 (if you have time, http://dotsub.com/films/_14/index.php?autostart=true&language_setting=en_3208). I therefore was not surprised when WB cut China's PPP adj GDP by 40%, and I think it's correct. + in case of China, GDP is especially meaningless measure, since it matters little for the 700K people that die prematurely from pollution, are refused basic justice in the court system or have to pay every last penny to get medical help. By chegewara - 5/27/2008 8:19 AM

chegewara: which is confirmed by other stats like electricity, coal and ore consumptions, and of course, completely absent from the Chinese stats. Actually it isn't. You are thinking about a paper by Thomas Rawski which claimed that GDP figures were inconsistent with oil/coal consumption, and therefore GDP figures were overstated. The interesting thing about his paper is that he never considers the possibility that oil/coal consumption was vastly understated. If you take the hydrocarbon figures at face value, the Chinese industry is implausibly efficient at using oil. The other problem with Madison and Wu is that they don't seem to take into account the elimination of dual pricing between 1990 and 1995, which would overstate industrial output for the early years and understate industrial output for the later ones. The other problem is that assuming zero productivity growth for non-material services between 1990 and 2000 seems extremely implausible as does relying on official employment statistics to estimate the number of people in the service economy. The reason that the PRC no longer gives detailed estimates of employment is because it can't. This is precisely because the SOE's have closed down, and the government has no good way of tracking what people are doing any more. chegewara: I therefore was not surprised when WB cut China's PPP adj GDP by 40%, and I think it's correct. + in case of China, GDP is especially meaningless measure, since it matters little for the 700K people that die prematurely from pollution, are refused basic justice in the court system or have to pay every last penny to get medical help. The problem is that you can create alternative indices of growth that take into account quality of life and environmental damage, but the trouble there is that you are just trying to reduce far too much to one number. Also GDP isn't a meaningless statistic because if you do try to quantify things like the environment or social justice as Randall Peerenboom has, you find that everything correlates to per capita income. By Twofish - 5/27/2008 10:26 AM

One thing that this does point out is why its important to have lots of numbers that create a general picture about what is going on. If you have one number then its easy to change the number to get a more optimistic or pessimistic picture. If you have a thousand numbers, then changing one number changes the overall situations in complex ways. For example, if I think that the unemployment numbers in 1998 were vastly understates, that's bad... No that's good because it means that that productivity is higher than I otherwise would calculate. If I think that the statistics vastly understate the number of people working in the cities, that's good.... No wait, that's bad because it means that urbanization rates are higher than they should be which means that China is closer to its growth limits. Also it's important to go through why the numbers are what they are. If you just give me a GDP number, I can't do anything with it. If you go through a long explanation of each input and where all of the numbers come from, then we can go through each number and point by point critique each input. Finally, some thing become more obvious over time. It's possible to show lots of apparent growth for short periods of time but reality eventually gets you. If you look at the papers and books written around 2000, it's now apparent that they were wrong, because if the situation were as dire as they said, things would have collapsed by now (see The Coming Collapse of China by Chang or anything written by Gerald Segal in the 1990's). The problem when people make a bad prediction is that people tend to want to forget about, whereas the thing to do is to go back and figure out where people got it wrong. One thing that people consistently get wrong is to underestimate the human element in history. People in a lot of these books see a bad trend and then extrapolate it, not realizing that human beings can change things if they are going in a direction they don't like. Conversely, you can start off with all of the possible advantages and just completely mess things up. By Twofish - 5/27/2008 12:27 PM

One other irony of history is that the more you worry the better things will turn out to be in the end. One reason I'm optimistic about China is that everyone is worried about it. There are about a hundred things wrong with it, and a hundred or more things that need to be fixed. As long as people see things to be fixed and don't get too hopeless about it, then things do tend to get fixed. It's when people think that there isn't a big problem that the big problems start. By Twofish - 5/27/2008 12:32 PM

Isnt it amazing that 'stocks rise on a wall of worries, and drop on a slope of hopes'? The irony of human history is equally reflected in stockmarket history too. Twofish, your posts are enlightening and entertaining. By kelaido - 5/27/2008 7:32 PM

twofish: One reason I'm optimistic about China is that everyone is worried about it. this has got to take the cake. if there is one thing people bet on in the investment management industry, it's that China is going to grow at 10% for the next 5-10 years. By chegewara - 5/27/2008 11:19 PM

twofish: You are thinking about a paper by Thomas Rawski which claimed that GDP figures were inconsistent with oil/coal consumption wrong, i'm basing it on CEIC as cited in Houser, Rosen "China energy guid for perplexed". if you say here CEIC numbers were understated, how can you claim in other places Chinese statistics are trustworthy? twofish: If you look at the papers and books written around 2000, it's now apparent that they were wrong, because if the situation were as dire as they said, things would have collapsed by now (see The Coming Collapse of China by Chang or anything written by Gerald Segal in the 1990's). wrong. you have to update your bookshelf. there is a good discussion by Will Hutton and i suggest you look into Jim Walker. as you said, a lot of things have changed in China, i think the serious problems with growth direction started around the year 2002. By chegewara - 5/27/2008 11:28 PM

chegewara: wrong, i'm basing it on CEIC as cited in Houser, Rosen "China energy guid for perplexed". if you say here CEIC numbers were understated, how can you claim in other places Chinese statistics are trustworthy? You do the hard work of looking at each and every number with a critical eye. Where did that number come from? How do I know if it is correct? How do those numbers mesh with other numbers and what I'm seeing in the street. In the case of oil production numbers, there are very good reasons to think that the numbers of all. Between 1995 and 2001 the oil industry was broken up into three listed corporations, Also during this time, the state price was higher than the market price of oil leading to massive amounts of smuggling. The reason I think that the energy numbers are suspect is that you end up with what I think are implausibly low CO2 production rates and growth in efficiency. CPI and incomes are harder to get wrong. Look outside and take a walk. chegewara: wrong. you have to update your bookshelf. there is a good discussion by Will Hutton and i suggest you look into Jim Walker. as you said, a lot of things have changed in China, i think the serious problems with growth direction started around the year 2002. There is a good link here.... http://www.prospect-magazine.co.uk/article_details.php?id=8174 The problem I have with Hutton is that he seems too wedded with the idea that history *ought* to work a certain way, and so any deviation from the idea situation is considered a sign of collapse. Also he asks a lot of rhetoric questions but doesn't dig at the answers. How long can an economy save at 40%? You can get the answer from looking at historical situations and the answer is a few decades. Also, you look at the amount of economic growth that comes from exports and it's not the main driver of growth. Also the figure of dollar of output per dollar of input is misleading. As you increase investment, the marginal return decreases. Also Chinese agricultural productivity is indeed very, very bad, which means that you get huge boosts in wealth just by moving people off the farm. Another source of wealth is redistributing labor from non-productive factories to productive ones, which is why manufacturing output is increasing while employment has been constant. Finally since 2002, China has been in at the top of the business cycle, and the business cycle will inevitably turn downward, but I haven't seen anything that suggests that the economy will come anywhere near a crisis when it does. By Twofish - 5/28/2008 1:56 AM

chegewara: wrong, i'm basing it on CEIC as cited in Houser, Rosen "China energy guid for perplexed". if you say here CEIC numbers were understated, how can you claim in other places Chinese statistics are trustworthy? You do the hard work of looking at each and every number with a critical eye. Where did that number come from? How do I know if it is correct? How do those numbers mesh with other numbers and what I'm seeing in the street. In the case of oil production numbers, there are very good reasons to think that the numbers of all. Between 1995 and 2001 the oil industry was broken up into three listed corporations, Also during this time, the state price was higher than the market price of oil leading to massive amounts of smuggling. The reason I think that the energy numbers are suspect is that you end up with what I think are implausibly low CO2 production rates and growth in efficiency. CPI and incomes are harder to get wrong. Look outside and take a walk. chegewara: wrong. you have to update your bookshelf. there is a good discussion by Will Hutton and i suggest you look into Jim Walker. as you said, a lot of things have changed in China, i think the serious problems with growth direction started around the year 2002. There is a good link here.... http://www.prospect-magazine.co.uk/article_details.php?id=8174 The problem I have with Hutton is that he seems too wedded with the idea that history *ought* to work a certain way, and so any deviation from the idea situation is considered a sign of collapse. Also he asks a lot of rhetoric questions but doesn't dig at the answers. How long can an economy save at 40%? You can get the answer from looking at historical situations and the answer is a few decades. Also, you look at the amount of economic growth that comes from exports and it's not the main driver of growth. Also the figure of dollar of output per dollar of input is misleading. As you increase investment, the marginal return decreases. Also Chinese agricultural productivity is very, very bad, which means that you get huge boosts in wealth just by moving people off the farm. Another source of wealth is redistributing labor from non-productive factories to productive ones, which is why manufacturing output is increasing while employment has been constant. By Twofish - 5/28/2008 1:57 AM