Now that 90 days have passed, from the Huffington Post from Last August: China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run
Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash--in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises.
I was wrong for least twenty-five years straight--the jury is still out on the period since 2005. And that makes me very hesitant, now that a crash--even if, perhaps, not the crash I was predicting--is at hand, to count China and its supergrowth miracle out.
A great deal of China super-growth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm by the misgovernment of the Qing, the civil wars of the first half of the twentieth century, the Japanese conquest, and the manifold disasters of rule by paranoid Parkinson's Disease-sufferer Mao Zedong. Take convergence to that East Asian societal-capability norm, the wisdom of first Deng Xiaoping, then Jiang Zemin in applying the standard Hamiltonian gaining-manufacturing-technological-capability-through-light-manufacturing-exports development strategy (albeit on a world-historical scale), and a modicum of good luck, and China seemed understandable. There thus seemed to me to be no secret Chinese institutional or developmental sauce.
Given that, I focused on how China lacked the good-and-honest-government, the societal trust, and the societal openness factors that appear to have made for full convergence to the U.S. frontier in countries from Japan and Singapore to Ireland and France. One of the few historical patterns to repeat itself with regularity over the past three centuries has been that, wherever governments are unable to make the allocation of property and contract rights stick, industrialization never reaches North Atlantic levels of productivity.
Sometimes the benefits of entrepreneurship are skimmed off by roving thieves. Sometimes economic growth stalls. Sometimes profits are skimmed by local notables, who abuse what ought to be the state’s powers for their own ends. China--in spite of all its societal and cultural advantages--had failed to make its allocation of property rights stick in any meaningful sense through the rule of law. Businesses could flourish only when they found party protectors, and powerful networks of durable groups of party protectors at that.
Another headwind for China in the future is that, as the very sharp young whippersnapper Noah Smith1 points out, the Hamiltonian manufactures-export strategy is played out, not just for poorer countries wishing to emulate China but for China in the future. Historically, the Hamiltonian strategy of moving farmers to factories and setting them to work using imported manufacturing technology is the only reliably-successful development strategy, because manufacturing technology is the only one that can be reliably imported--you buy the machines to make the products, you buy the blueprints for the products to be made, and with a few engineering coaches hired from abroad you are in business. But that requires that people outside your country buy your low-priced manufactures. And the world has reached a point at which demand for manufactured goods is no longer highly elastic. Already James Fallows2 reports on Chinese entrepreneurs lamenting how the real profits flow to the owners of scarce natural resources or the owners of brands and of design and engineering resources, leaving those who actually make the manufactured goods with only crumbs.
Greece or Chile thus seemed to me to be China's most-likely future, and it always seemed to me it would take quite a while to get there.
Yet, so far, contrary to my expectations for more than a generation, China has hitherto kept growing and growing rapidly even without anything a North Atlantic economic historian would see as the rule of law. It has had its own system of what we might call industrial neofeudalism. Instead of property and contract rights the king's judges will enforce, Chinese entrepreneurs have protection via their fealty to connection-groups within the party that others do not wish to cross. It is, in a strange way, almost like the libertarian fantasy in which you hire your own personal police department in a competitive market come to life. Such a system should not work: Party connection-groups should find themselves unable to referee their disputes. The evanescence of their positions should lead them into the same shortsighted rent-extraction logic that we have seen played out over and over again in Eastern Europe, sub-Saharan Africa, Southeast Asia, South Asia, and Latin America. And yet, somehow, in China, eppur si muove.
Now I do believe that after this stock market crash China is likely to have another five to ten years of very healthy growth. The party can redistribute income from the rich to the middle and the poor, and from the coasts to the interior. Mammoth demand from an enriched urban middle class and peasantry can provide business for all of China's factories that otherwise would be selling into an export market with lower-than-expected demand elasticity. The interior can be brought up to the manufacturing productivity standards of the coast.
But that, I think, is the last trick the Chinese government can play to keep anything like Chinese supergrowth going. And after it is played, China will--unfortunately--more likely than not become another corrupt middle-income country in the middle-income relative development trap.
I have been wrong about the duration of China's growth miracle for all of my adult life. But I am confirmed in my forecast when I read the thoughts of very sharp China perma-bull Stephen Roach3:
There are many moving parts in China’s daunting transition.... While progress on economic rebalancing is encouraging, China has put far more on its plate: simultaneous plans to modernize the financial system, reform the currency, and address excesses in equity, debt, and property markets... [plus] an aggressive anti-corruption campaign, a more muscular foreign policy, and a nationalistic revival couched in terms of the “China Dream.”... The economic-reform strategy [could be] stymied by the lack of political will in a one-party state.... History is littered with more failures than successes in pushing beyond the per capita income threshold that China has attained. The last thing China needs is to try to balance too much on the head of a pin. Its leaders need to simplify and clarify an agenda...
Therefore I once again say: China's supergrowth has five more years to run. And, after it ebbs, China's success at grasping the future depends not on economic growth but on political reform--the establishment of the rule of law and an open society rather than the rule of the CCP and a closed party elite--and only after successful political transition might economic growth and convergence resume.