No, the Federal Reserve Is Not a Market Manipulator

Martin Wolf and I See the Odds on the Different Future Chinas Somewhat Differently

Over at Equitable Growth Martin Wolf calls himself a long-run China optimist--that China is more likely than not following the Korean road, is now where Korea was in the early 1980s, and:

South Korea’s real GDP per head has since nearly quadrupled in real terms, to reach almost 70 per cent of US levels. If China became as rich as Korea, its economy would be bigger than those of the US and Europe combined...

Last week for the Huffington Post I gave my case for China pessimism: that what Japan, Korea, Spain--even Singapore--demonstrate is that escaping the middle-income trap requires institutional convergence to the North Atlantic to generate education and flexibility and to greatly reduce the burdens of corruption and of one-party ossification as nobody dares tell those at the top what a further round of economic growth requires. READ MOAR

The point for Martin's relative optimism is that I have now been wrong about China's future for a quarter of a century straight. It has, indeed, astonished the world.

Nevertheless, I cannot help but think that Brazil or Chile--or in the best case Greece--is the image of China's future. And that is, relative to where China was in 1975, a very, very bright future indeed. It is just not the future that makes the second half of the twenty-first century the Chinese future. And it is not the future the people of China are worthy of:

Martin Wolf: China risks an economic discontinuity: "The important economic fact about China is its past achievements...

...Gross domestic product... from 3 per cent of US levels to some 25 per cent.... This transformation is no statistical artefact. It is visible on the ground. The only ‘large’(bigger than city state) economies, without valuable natural resources, to achieve something like this since the second world war are Japan, Taiwan, South Korea and Vietnam. Yet, relative to US levels, China’s GDP per head is where South Korea’s was in the mid-1980s. South Korea’s real GDP per head has since nearly quadrupled in real terms, to reach almost 70 per cent of US levels.... This is a case for long-run optimism. Against it is the caveat that ‘past performance is no guarantee of future performance’. Growth rates usually revert to the global mean. If China continued fast catch-up growth over the next generation it would be an extreme outlier....

‘Discontinuities’... as in Brazil in the 1980s or Japan in the 1990s?... The core argument for a discontinuity is that it is hard to move smoothly from an unsustainable path. The risk is that the economy slows much faster than almost anybody now expects.... The best approach would be to continue with reforms, while trying to put more spending power into the hands of consumers and investing more in public consumption and environmental improvements.... Moreover, the challenge is not only, or even mainly, technical. A big question is whether a market-driven economy is compatible with the growing concentration of political power. The next stage for China’s economy is a conundrum. Its resolution will shape the world.