In June 2020, a group of six World Bank economists issued a very interesting paper called “China’s Productivity Slowdown and Future Growth Potential,” in which they explain why Chinese productivity growth has declined so markedly over the last several years. The authors argue that China’s total factor productivity (TFP) growth was between 3.1 percent and 3.5 percent in the 1980s and 1990s, after which it began to drop. They go on to say:
Aggregate TFP growth slowed from 2.8 percent in the 10 years before the global financial crisis to 0.7 percent in 2009–18. In 2017, signs of improving labor productivity and TFP growth emerged but both remain significantly lower than their pre-crisis levels. Although weaker productivity growth in China has coincided with—and likely been affected by—the recent decline in world productivity growth, the deceleration in China has been sharper.
The paper provides some very helpful details about China’s declining productivity growth, including differences by time period and by region, and it also suggests how sector shifts may have affected changes in productivity. Among other things, the paper recommends policies to hasten the shift in the Chinese economy away from less productive sectors; it argues, correctly in my opinion, that “strengthening market institutions for the effective management of insolvency, firm restructuring, and bankruptcy could accelerate productivity growth.”
These recommendations are almost certainly good ones, if a little generic (an occupational hazard of World Bank papers), and the paper is well worth reading for those interested in understanding problems in the Chinese economy. But I have two big “systemic” problems with the approach taken in this paper—and in many, if not most, similar China-related academic papers. My criticism isn’t really specific to this paper, in other words, but a response to an overall approach that seems to dominate academic analysis of the Chinese economy.
These World Bank authors assume that China’s total levels of economic and productivity growth will continue creeping closer and closer to those of the West as long as the country continues to attract capital and secure technology transfers. But there are compelling reasons to believe that such steps won’t be nearly enough to get China’s economy on par with the West in per capita terms.
The Perils of Measuring China’s GDP (and Productivity)
My first problem is in measuring productivity growth. The authors use a standard Cobb-Douglas production function—in which output is a function of capital, labor, and TFP—to decompose the components of output per worker. This, of course, requires a measure of output, for which the authors use the real GDP data provided by China’s National Bureau of Statistics. GDP data is the standard measure of economic output that economists use for most countries, so this is a pretty common approach to measuring productivity. But, of course, it implicitly assumes that GDP growth in China is as much a proxy for real value-creation in the economy as it is in any other country.
Here is where the problem lies. Most economists agree that China suffers substantially more from nonproductive investment than other countries do, and because this investment is not written down to the extent that bad investment is recorded in other countries, it should follow that China’s GDP data is not comparable to that of other countries. Put differently, while GDP growth in China is a measure of the growth in economic activity, as it is in most economies, the relationship between economic activity and value creation is not the same in China as it is in most other countries. That means that GDP growth cannot be used in the same way as a meaningful measure of output with respect to China.
Notice I am not just saying that GDP isn’t a perfect measure of value creation in China. It isn’t a perfect measure anywhere in the world, but as long as it has some consistent and unbiased relationship to output, GDP growth rates can nonetheless be useful in comparing the evolution of a country’s “real” economy over time and in comparing the performance of various economies.
The problem in China is a very different one. The fact that a large and rising share of economic activity in the country consists of nonproductive investment that isn’t correctly written down means two things. First, the relationship between Chinese GDP growth and growth in the real economy isn’t consistent. Second, Chinese GDP growth is not comparable with that of other countries. Those with an accounting background would say that what in other countries would be expensed is in fact capitalized in China: this approach necessarily must result in faster growth and higher asset values on paper in China compared to the underlying value of the economic activities themselves. More specifically, GDP growth in China will overstate the relative growth in output for many years, until, basically, the country reaches its debt constraints, after which GDP growth will be understated mainly because the same amount of “real” growth will be measured against an artificially high base.
I have discussed many times elsewhere why the use of GDP growth as a systems input in China—as opposed to it being a measured output nearly everywhere else—makes it impossible to compare China’s GDP to that of other countries (for example, see here and here), but the easiest way to explain this point is with a simple thought experiment. Imagine that there are two countries like China with identical economies: the same people doing the same things with the same resources. The only difference is that, in the first country, nonproductive investment is written down more or less in line with other countries, whereas in the second country nonproductive investment isn’t written down. In accounting terms, the cost of writing down an asset is treated as an expense in the first country (so it reduces business profits, which in turn reduce the value-added component in the GDP calculation), whereas it is treated as a capital investment in the second.
Because of the capitalizing of expenses in the second country, as long as the amount of nonproductive investment is not trivial, the first country will have a lower GDP growth rate and less wealth than the second, and for that reason the growth in labor productivity would also be lower—on paper. This is true even though, remember, we have defined the real economic activity of these two countries as identical. Needless to say, economists who genuinely want to understand the country’s underlying economic performance—that is, its wealth-creation capacity—would prefer to use the data from the first country for their analyses, and they would reject data from the second as relatively useless, unless they had a precise way of making the needed adjustments.
The notion that China effectively capitalizes expenses isn’t at all controversial. Most economists would agree that there is a substantial problem with overinvestment in China, and when pressed they will acknowledge that it resembles the second of the two countries described above, not the first. But they will also point out that there is no way to correct the data with any precision. Surprisingly, that leads them to ignore the problem. As one of them explained six years ago:
If economists start trying to subtract perceived malinvestment from GDP, then estimates of GDP will vary wildly from economists to economist, based on how big each one thinks the bubble is . . . If we do what Pettis recommends and subtract our subjective estimates of the percentage of future unused housing from GDP, then you and I will come up with two different GDP numbers!
Disagreeing on the data is much worse, apparently, than agreeing on data that is simply wrong. To the extent that economics is mostly an academic discipline, that’s okay, because in the social sciences being wrong is much less of a problem than being imprecise.
For those who want to understand what is happening in China, however, I would argue that this is a huge problem. Without acknowledging the very severe systemic biases in the time series of the data, we have to be far more skeptical about the meaning of our conclusions than most economists seem willing to acknowledge. If we include large amounts of nonproductive activity in our measure of “productivity,” at the very least the meaning of the word is stretched close to the point of becoming nonsensical.
The point is that, for many years, when most Chinese investment was productive and growing rapidly, productivity measures based on the country’s GDP data were meaningful, and these measures represented “reality” in a fairly consistent, unbiased, and comparable way. If they weren’t “correct” in a fundamental sense, they were no less so than in other countries, but because their failures were consistent and unbiased, first and second derivatives were meaningful, useful for comparing (over time or with other countries), and reasonably accurate.
But once China began systematically misallocating large amounts of investment, and as the amount of the misallocation grew as a share of GDP growth (as I explain here), the relationship between GDP and “reality” became detached, with the gap growing over time, in which case first and second derivatives (like GDP growth and per capita productivity) are no longer meaningful measurements.
The Pitfalls of Predicting Economic Convergence
My second “systemic” problem with the approach taken in the World Bank paper (and many other similar papers) is when the authors argue the following:
From the perspective of international convergence, China’s growth potential remains significant. As per capita income and productivity are still far below those observed in advanced countries, there is significant room for catch-up growth through capital deepening (albeit crucially in the private sector), human capital accumulation, and improvements in TFP. . .
Even after four decades of 10-percent growth per year, China’s growth potential remains high. Per capita income in China is less than a quarter of the high-income country average at market exchange rates and less than a third in PPP terms. Despite advances in sectors such as ecommerce, fintech, high-speed trains, renewable energy, and electric cars, China generally remains distant from the global technological frontier. TFP is less than half that in the United States and lags the TFP levels in a number of middle-income countries. Hence, there is scope for China to catch up to global leaders through the transfer of technology and state-of-the-art management practices.
The implicit assumption here is that development is partly a function of incremental investment per capita: a country always grows as it approaches the capital frontier set by the United States. Poor countries are poorer than rich countries, according to this assumption, mainly because they don’t have the levels of technology and capital stock that rich countries do. As they continue to deepen their levels of capital investment, their productivity levels will rise until their incomes converge with those of rich countries.
If this assumption were really true, economic convergence would be a much more obvious fact of history than it seems to be. In actual fact, convergence is so rare as to be almost non-existent. I would argue that there have really been only four cases of very undeveloped economies reaching advanced economy status, and in every case this occurred for very special reasons that cannot be easily replicated by capital deepening. Two of them—Singapore and Hong Kong—are tiny trading entrepots that got rich by exploiting massive financial and trading efficiencies. The other two—South Korea and Taiwan—are also very small economies that benefited from their key political roles during the Cold War.
This doesn’t mean that more investment does not lead to more wealth. It does in certain conditions and it doesn’t in others. Rather than simply assuming that either it always works or it never works, I think it is far more useful to consider the basic conditions under which more investment increases productivity and wealth and the conditions under which it doesn’t. I have discussed this before (for example, here), but to simplify, I would suggest that we begin by distinguishing between countries whose investment levels are far below their capacity to absorb investment productively and countries whose investment levels are not.
The key assumption here is that the upper limit of an economy’s productive capacity—which we can think of as its ability to take productive advantage of labor, capital, technology, and other resources—isn’t uniform across all countries. Instead, it depends on the set of formal and informal institutions (political, legal, financial, tax, social, and educational) that govern economic behavior.
To cite just one hypothetical example, Canada, in other words, isn’t richer than Bolivia because Canadians have more gold, oil, computers, bridges, or airports, but rather because of a complex constellation of institutions that allow Canadian workers and businesses to operate at much higher levels of economic value creation. Take a relatively educated Bolivian and transport her to Canada, and once you eliminate constraints of language, discrimination, and social conformity, her productivity will quickly rise to Canadian levels.
This is because the amount of capital and technology the average person in Canada can absorb productively is much higher than that which the average person in Bolivia can absorb. Almost everyone would agree with this point, but not, apparently, with the obvious conclusion it points to: increased capital deepening is not enough bring Bolivia to Canadian levels of wealth and productivity without a complete transformation of the formal and informal institutions that have held Bolivians back. So, without this transformation, how much capital deepening is appropriate for Bolivia? Enough to “catch up” not to Canada, but rather to whatever the appropriate level of capital and technology may be, given its particular set of formal and informal economic institutions. Canada might benefit economically, for example, from highly advanced transportation and communication facilities that would be wasted in Bolivia.
I will refer to this level of capital and technology as the Hirschman level because Albert Hirschman wrote so brilliantly and extensively about this process. More capital, in other words, will generate further real growth in Bolivia as long as the country is below its Hirschman level of investment, but once it reaches that level, further development comes not from more capital deepening, but rather from institutional reform.
Consider European countries after 1918 or Europe and Japan after 1945. They were highly advanced economies that had been devastated by war and thrown into poverty, but because their institutions remained largely intact, they were nonetheless able to grow extremely quickly after the wars, largely as a function of rapid increases in investment. They had, in other words, very high Hirschman levels, even though, after the war, their capital stock had been destroyed to way below their Hirschman levels. But after many years of spectacular growth driven by capital deepening (in large part restoring the infrastructure and manufacturing capacity that had been wrecked by war), each of these countries reached that point again, after which their growth rates slowed rapidly. Their actual levels of investment had “caught up” not to the capital frontier set by the United States but rather to the Hirschman levels consistent with their own domestic institutions.
The same has been true of China. When the reform era began in the late 1970s, the country had emerged from five decades of anti-Japanese war, civil war, and Maoism that had left it terribly underinvested—relative not to the capital frontier set by the United States, but rather, more meaningfully, to a Hirschman level of investment that its own institutions allowed it to absorb productively. China was an educated and highly organized economy with extremely backward infrastructure and punishingly limited manufacturing capacity, so, like the European countries ravaged by war, its investment level was very low compared to the upper limits set by its institutional development.
What China’s Economy Really Needs
In China’s case, the fastest way to develop in the 1980s and 1990s was to increase capital deepening as rapidly as possible. But with the fastest investment growth rate in history, it was always just a matter of time before it reached its own Hirschman level, after which the way to continue developing rapidly could only be to force through the necessary institutional reforms that allowed Chinese workers and businesses to absorb higher levels of investment productively. The fact that returns on capital—as the World Bank research paper demonstrates very lucidly—vary so greatly from province to province, even though Beijing has counted on convergence for years, must show that there is a lot more to development than building more bridges or acquiring technology. These varying province-to-province returns on capital also show that there is probably not a single Hirschman level for a large country like China, but several such levels depending on the peculiar set of institutions governing different regions and provinces.
Being further behind economically does not increase the probability of catch-up except in specific cases, usually in cases where, for historical reasons (like war, revolution, political circumstances, or incompetence), a country’s level of investment has fallen far behind its Hirschman level, which is itself determined by the development level of the country’s institutions. The so-called middle income trap is, in my opinion, a recognition of this fact. The authors of the World Bank paper instead write that “China remains, on average, quite distant from the global technology frontier and thus has substantial remaining potential for catch-up growth,” so they recommend “the adoption of more advanced technology and management skills from high-income countries, as well as improving the efficiency of resource allocation.” Except to the extent that the phrase “improving the efficiency of resource allocation” is carrying an extraordinarily heavy load, I think this is likely to be the wrong approach and will lead mainly to more investment misallocation in the country.
What China really needs is a transformation of its institutions in a direction that some might argue is very different from the direction it is currently following.
Aside from this blog, I write a monthly newsletter that covers some of the same topics. Those who want to receive complimentary subscriptions to the newsletter should write to me at chinfinpettis@yahoo.com, stating affiliation. Twitter: @michaelxpettis
Comments(37)
How does the Chinese demographic situation factor into the equation? To me , China has a short term, medium term and long term problem. ST, savings glut/export based economy which is increasingly unpopular in a high unemployment-low inflation world. MT, debt overhang from unproductive investment. (Made worse by increases military spending).LT, terrible demographics from a low birth rate , too few daughters, and a dwindling supply of rural workers to fuel urbanization.
The demographics are pretty bad but, as you note, they are a long term problem. How they respond to that will depend crucially on how they resolve the debt and rebalancing problems.
Thanks for this piece. Out of curiousity, is there a reasonably accurate way to quantitiavely determine the "Hirschman level" of a county's economy?
I think that would be difficult to do directly, but perhaps there is a way to do so indirectly.
Hi Michael, Now that I have thought about this Hirschman limit a little more, I am curious to know if the difference in standards of living amongst two different first world countries (say, Canada and the US or France and Switzerland) can also be attributed to Hirschman levels, or whther there is something else at play? I always assumed that the differences were priarily due to natural resources,population sizes and densities, ease of transportation of goods, banking systems' treatment of risks, etc, but maybe there is a bit more to this? Just curious about your thoguhts.
Unless a country is a major oil exporter relative to its population, I think a wealthy country is simply one whose institutions allow it a high Hirschman level.
OK, but to belabour the point just a little bit, if the US were to have "perfectly" functioning institutions as opposed to just the "very good" ones it has now, does its Hirscman level increase and does it more or less axiomatically follow that it would become even wealthier? If so, is there a limit to its growth (is there an "economic Hirschman frontier")? I apologize if this are stupid questions--I am a little slow sometimes... :)
Can everyone be better off, but maybe not best off, in a world with sharp income inequality? In other words, can't lower income people's lives still improve, even though the very rich will become much better off, through technology or otherwise? (This would be the predictable argument from tech elites). If someone creates Google and that increases wealth inequality, how does loss come about?
Income inequality is only good for growth in countries in which desired investment is constrained by scarce savings. Otherwise it actually reduces investment by creating excess capacity which can only be absorbed by rising debt.
But what does "good for growth" mean? People will argue that growing living standards for the middle class, even if not growth in real incomes, is acceptable, even if it isn't ideal. In other words, your wages may be flat but now you have Google and an IPhone so how can you say there hasn't been substantial growth in living standards? I find I have a hard time coming up with a punchy counter to this (common) argument even though it feels wrong.
Tech_CounterArgument, if I may? What does Mike mean "good for growth." High inequality can be good for growth when the capital structure is meagre or non-existent. High inequality of incomes mean that people are NOT allowed to work for themselves, they are compensated substantially below their true economic value, as such the economy does not take shape around their spending, that spending power has been given to the wealthy and the powerful and they are using those resources to build the capital structure. The people don't get to consume their efforts, those efforts are directed into the capital structure. As slave labor built the South, and impoverished labor built Northern Industry. Now, high inequality is not needed, we have a rich and diverse capital structure. Your second question "are people better off now with a smart phone and google even if their real wages haven't grown if 40 years?" I say NO. In fact, what you proposed sounds like a deceit to me. If real wages have not risen, then the standard of living has not risen. When economists study these things they evaluate the enjoyment and productivity rise. If the standard of living has not risen for American working people for 40 years, it means that each little improvement, say the smart phone, or cell phone, has also subtracted from the other things that those people might have purchased. Now they can not afford a car, or can only afford a smaller car or house, or eating out less. Can you see the deceit, if the standard of living has not increased, it has not increased. It has only changed. Peoples lives have changed, but they have not improved. From a psychological perspective, and I've read this in a few places, over a 20 yrs span: much of a persons satisfaction or pleasure in life is connected to that persons appraisal of his respective position in society. If he sees that all others are near to the lifestyle he enjoys, he feels secure and satisfied with himself. If he sees that many others have a lifestyle far beyond anything he has, he will be unhappy, feel excluded. Humans are social animals. The respect and esteem of others are very important. So is rank. Being in the lowest caste is no fun, even if you have a smart phone. A question. If socialism, the government developed the internet, touch screens, GPS, and does 80 percent of the basic scientific research, what claim does that provide the public when others build upon those accomplishments?
Michael, I was a student of you. The basic concept you illustrated in this article, to me, is more or less like the idea raised by Premier Li, i.e. Institutional Reform Surplus. It makes sense. What I haven't quite caught up with is that, you are implying China is going in a different direction, i.e. putting more focus on inefficient investments and not willing to write down. But what about "房住不炒", what about "经济内循环"? I think that Government also know that some investments are not making much sense, and start to evaluate new directions like 5G, semi-conductor, e-cars. I guess it is inevitable for a centralized government to use industry policies, but it will also be bizarre for a trained student to assert that this kind of decision-making system could work better than the US system, while something keeps me sitting on the fence is the recent developments, is the US frontier also stop growing, or even contracting, will that makes it easier for China to catch up in next decade, like the Lenovo-IBM case, the industry growth stopped, China acquired technology, China squeeze the profit margin from cost-cut or price-cut. Albeit all the above, deep down, I do wish to see more institutional reform in China instead of simply stacking up more investment, building more bridges or even 5G base stations/ equipments.
While there are some "new" areas of investment that might be productive, they are pretty limited, and Beijing has been talking about switching for 10-15 years, without much success. I would argue that for its level of development and productivity, China has more bridges, trains, highways, etc. than it can productively use, and so it must focus on measures that raise its ability to use these and additional resources productively: things like rule of law, market allocation mechanisms, bankruptcy law, political institutions, financial sector, information disclosure, central bank policies, etc. etc. Unfortunately much of this might require political reforms that may prove difficult.
Thanks for your commentary Michael. We understand that China needs institutional reforms. Yet the paper failed to discuss exactly in what ways China approach these reforms. If you can provide the "how", that would be helpful as well.
I could be wrong, but I don't think he can detail the "how" so long as he resides in China...
I don't think there is a standard basket of institutional reforms that can be applied to every country. Not only does each country require institutions that fit its own circumstances, but the process of institutional reform is likely to be highly path dependent, so for each country that there are a set of very different paths it can successfully follow. After all Japan followed one path after 1870 and another after WW2, both of which led to advanced economy status. In neither case did Japanese institutions resemble American institutions -- or German or South Korean institutions for that matter -- and yet they all became advanced economies. Albert Hirschman reminds us that there is not one path to development but many. Unfortunately the moment you start discussing transformative institutional reform, you must also discuss the political implications, and that of course is not easy to do it an open forum.
Some examples of "how": China needs more efficient investment decision-making, to include more appetite for startup risks and less politically motivated investment. Currently, it's missing startup opportunities and pouring resources into uneconomic infrastructure expansion. Also, for political reasons, SOEs get credit more easily and at cheaper rates than private businesses. Yet, SOEs deliver poorer returns on assets. If it wants to attain technological leadership, China needs a better legal system, especially to protect IP rights. If it wants to discourage capital flight, the regime will have to pay more respect to private property rights. To be secure in his property, a private business owner must have strong political protection (ie, pay bribes or be related to the right people in the CCP). Corporate governance is another issue: the great majority of listed companies in China are controlled by a single controlling shareholder, often one with political clout. The West has a problem with managers of listed firms abusing shareholders; China's problem is with controlling shareholders abusing minority shareholders. There are many technical means to perform this abuse, but they're all types of self-dealing. Neither institutional investors nor auditors have any real power to serve as checks. On paper this agency problem has improved in China. In reality, the evidence of improvement is limited. The laws/regs simply are not enforced. And the probability of a minority shareholder successfully suing the controlling shareholder is remote. Corruption is endemic in the Chinese business world. I don't know what reform what suffice in the context of a vast one-party state. Pettis also wrote about this issue here: https://carnegieendowment.org/chinafinancialmarkets/52078
Professor Pettis: How is the "Hirshman Level" related to "Social Capital?" I note that the concept of social capital is one of the more important concepts I have learned from reading your blog.
Sorry, I didn't mean Robert. I meant gstegen.
National income accounting does not work like corporate accounting. In the calculation of GDP, the full cost of the asset is recorded in the investment account in the year in which it was acquired. There is no need to make adjustments in subsequent years should the asset become non-productive. That’s because the National Accounts have already recorded its full cost. To make a subsequent adjustment to investment or GDP would be redundant. It would amount to paying for the asset twice. Indeed, I know of no country in which GDP is adjusted for the productivity of its capital stock.
You are only partly right, and because your confusion occurs so often among those who inly partly understand GDP accounting, I always make sure to explain (not always to much effect, apparently) that it is the "writing down" of the asset that matters, not its creation (and it is indeed like corporate accounting, which also does not include the exchanging of cash for an asset as revenue). To explain again: when a business invests in a project that turns out to have no value, when it writes down the asset, this reduces its profitability, which in turn reduces its contribution to the value-added component of GDP. That is how it should (but doesn't, if it isn't written down) affect the GDP calculation. If entities in two countries each invest $100 in projects that create no value, and in one country that project is written down, but not in the other, the former will record $100 less GDP than the latter during the period in which the write-down occurred.
National income accounting is about the creation of value added, not the disposal of assets. That is why land sales, which appear in China's fixed asset investment do not enter into its value added investment calculation.
You're getting closer, Mark, but still not there. You are again confusing creating an asset with writing it down. That is why I wrote "I always make sure to explain (not always to much effect, apparently) that it is the "writing down" of the asset that matters, not its creation." To repeat: writing down an asset reduces the profitability of the business involved in the period of the write-down, which reduces the value-added component of the GDP calculation during that period. Please try to separate the idea of creating an asset from the idea of writing it down. They are very different activities. It is not the former that boosts GDP. It is the latter that reduces it.
You have argued extensively that additional captial deepening is wrong direction, but you aruged almost none on the reason for institutional reform. As a practional in Chinese financial industry myself, I feel only half of our title is aruged for, and the other should not be naturally assumed, given your controversial suggestions on the direction of the reform. I would be very pleased, and I assume many of your readers also, to see your reasoning on the necessisy and direction of the reform.
You are right, Robert, they are related.
Is the assumption that China's economy and e.g. the Western economies aren't the same because they one writes down malinvestment, while the other doesn't still true? Since the GFC US and European governments for the last decade having been pouring in trillions of dollars of loans to prop up businesses, the Fed spreadsheet has expanded greatly as well, etc. It seems to me that more and more of these advance economies are starting to look like Japan. If so, then can we compare GDP figures from China to other advance economies? Thanks.
What matters in the comparison, hmm, isn't whether governments "waste" money but whether that waste is expensed or capitalized.
The description of Japan is interesting, do you have factual evidence to back up your claims? Richard Werner has detailed what happened in Japan in 'Princes of The Yen' a salient example that I would encourage all people to watch.
Which claim? That Japan was among the "highly advanced economies that had been devastated by war "? I am pretty sure that Werner doesn't disagree with this claim.
'But after many years of spectacular growth driven by capital deepening (in large part restoring the infrastructure and manufacturing capacity that had been wrecked by war), each of these countries reached that point again, after which their growth rates slowed rapidly.'. In the 'Princes of The Yen' Werner details how it was a deliberate policy shift, using the very effective policy of credit guidance in a reckless manner to destabilize the economy and in the ensuing mess instigate free market reforms, particulary removing restriction on Bank credit.
Both Michael and Richard are right. Their points do not necessarily contradict each other. Japan's growth was driven by capital deepening supported by credit guidance and measures that distort distribution of income. So after reaching the limit, the only way to grow forward was debt, and at some point they will have to rebalance as Michael suggested. The policy shift was a political decision tainted by what's advocated everywhere at the time: free marker reforms as Richard detailed. What was needed to be done eventually was hijacked by an agenda to destabilize Japan's transition period during which the rebalancing occured.
'Most economists agree that China suffers substantially more from nonproductive investment than other countries do'. That confirms my understanding that most economists are clueless as to anything on this planet. '…The credit machine is so designed as to serve the improvement of the productive apparatus and to punish any other use.' Schumpeter What are symptoms of non-productive bank credit? ...Inflation. Excess credit to consumer markets will tend to cause consumer price inflation. Excess credit to asset markets will cause asset price inflation. Which markets in China are suffering from inflation from excess credit? Is a mortgage a non-productive or a productive loan? As UK and US specialise in using mortagages to drive their money supply.
Thank you for the posting. I read a very good article on Poverty Alleviation Legislation in Caixin. It reflects the issues you have been highlighting the last 10-12 years. In connection with this article I came to think of poverty alleviation through high interest rates in the rural banking system. Would a targeted rate hike to say 10-12% in rural area not be an efficient way of redistributing wealth ? If possible could you elaborate on how such a rate hike would effect the rest of the system ? I believe that selected rate hikes could be a significant allocation tool in the present system, but I am not sure of the downsides and what institutional push back it might meet
Seems a trifle presumptuous for an American economist to be advising Chinese economists when Chinese children graduate from high school three years ahead of ours and live longer, healthier lives and there are more drug addicts, suicides and executions, more homeless, poor, hungry and imprisoned people in America than in China. Or is it just me?
Don't you think it seems a trifle presumptuous for a random internet commentator to indirectly criticize a Chinese university to hire an American financier to teach Chinese students when the they can hire Chinese PhDs? Or is it just me?
Hi - Great article - thanks. These items you discussed are as you mentioned tied to what others call the middle - income trap. Of interest is whether or not China can escape the middle-income trap. Going from a per capita of say $4k to $10k is relatively easy. However, going from $10k to say $30k or $40k is much harder. As you mention escaping the trap is dependent upon many variables including the robustness of your institutions and economic systems. However, there are also other key factors that can make or break a countries ultimate success. From a geo-political point of view for example – doing business in the USA has been much cheaper due to a variety of factors including cheap transport - > 10k miles of navigable water ways, huge swathes of arable land etc. etc. Another factor is demographics which for China is very scary. The population will be half the current population by the end of the century, and they are aging much faster than most other countries. Also, to go back to the middle income trap - It`s unknown as to whether or not a authoritarian regime (and increasingly so) can escape the middle income trap?
Singapore, hk are transfer medium Taiwan is an undeveloped country/region (whatever you call) outside of Taipei (if you can even label that) Korea has one of the highest household leverage.
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