This has impact on the US and global economy as well, as China is no longer "exporting deflation" as it did throughout the first two decades of the 2000s.
I do not understand why the Chinese government would throw away its succession policy (critical for long- term stability) for someone with Xi’s record. It’s all cost with no apparent gain.
Sure. The bullish case is that industrial policy will succeed and that agglomeration effects will keep increasing the local market size for Chinese products.
I'll tell you the bullish case sitting here in Hong Kong. They will basically have a whole bunch of people here and Shanghai and elsewhere looking to create everything in Wall Street + international supply chains so that they can then continue to support China's growth with it, in turn, going out investing elsewhere such that it becomes a MCGA economy leading to a two-horse, dumb, pointlessly annoying Cold Economic War with us Indians feeling the squeeze from both sides. Anyway, impossible to do more than one or five-year analyses right now. I'm with Noah. Let China enjoy its decade of austerity.
Not like anyone has told me any of this but I would think they will eventually get to the stage where they figure this out. It's all in Chinese, I'm sure. If the US Builds Back Better and gets better supply chains and it will weaken and crumble just like Soviet Union did. It's all gotta be sustainable
If I understood the background correctly, China’s growth in overall / per-capita wealth has been driven by resource mobilization / capital accumulation, but those growth drivers have hit diminishing returns, and the way forward is productivity growth. (And then your article explains the obstacles to said growth.)
Having never taken macro, I’m not sure what that actually means! :)
I read the Wikipedia entries for resource mobilization, capital mobilization, and productivity growth, and I don’t quite understand what they are exactly, or how they lead to growth in per capita living standards (presumably the goal of growth.)
It would be super helpful if you could provide concrete examples of each, and some intuition on the mechanism whereby they lead to (broadly shared) growth.
I can't help but notice the difference in tone regarding Chinese innovation and dynamism between this blog and some Bloomberg writers.
This:
Adrian Wooldridge: "The institutions, practices and mind-set that enabled the U.S. to create a workforce capable of powering the world’s biggest and most dynamic economy are threatened by decay, disarray and disruption. And that is happening while China, a rival hostile power that poses an even greater challenge than the USSR once did, pulls ahead of it in world-defining technology. Once galvanized to action by the USSR’s launch of Sputnik, the U.S. now witnesses the equivalent of the launch of a dozen Sputniks from Beijing every year, with no corresponding response." https://www.bloomberg.com/opinion/articles/2022-02-04/2022-worker-shortage-u-s-needs-to-boost-top-talent-to-stack-up-to-china
Vs:
Noah: "But the quality of this research has been called into question. Investigations regularly find that despite all this publication activity and all this spending, Chinese universities are not the leaders in most fields of research. Basically, the story is that Chinese scientists are under tremendous pressure to publish a ton of crappy papers, which all cite each other, raising citation counts."
It's hard to say who is more accurate here. I'm leaning with Noah's take for now while taking the Wooldridge report as a warning to not fall asleep at the wheel either.
Slower working population growth should actually *speed* productivity growth, because of the need for improvements. It slows absolute growth of the economy, for bragging and military purposes, but not per capita. Otherwise, yeah, China has a lot of headwinds.
It's hard to measure TFP, and it is easy to underestimate it. TFP is the difference in production that is independent of increased capital spending and increased labor input. It's a secret sauce that involves restructuring processes, introducing new technologies and improving management and incentives. When it gets put into place it can seem to be a drag on productivity. It is only when the bugs are worked out, the process is absorbed, and production rises to match the new capabilities - something that might require price and market adjustments - that the new productivity appears in the measurements.
Two classic examples are the TFP in the late 19th century and during the Great Depression of the 1930s. The economy was restructuring and new technologies were being absorbed wholesale, but the TFP improvements were hard to see until decades later. Economists have long noted that they see computerization everywhere except in productivity figures, but we seem to be approaching a point of revision where the TFP changes become more obvious.
P.S. I've been reading about the food delivery problems in COVID threatened Shanghai, and one big problem is that Chinese people don't eat a lot of processed foods. They rely on fresh meats, fish and vegetables. Most households don't have 10 kilo bags of rice in their pantries like American preppers. There is no 7-11 warehouse full of beef jerky snacks and frozen microwave dinners as fuel the protagonists of so many zombie apocalypse movies. Think of the relative efficiency and robustness of America's agricultural system. Our crappy diet might not be good for us, but it is probably good for our TFP.
My paranoia says China could team up w/ Russia & corrupt regimes in Africa& east Asia to suck in technology (from Russia) & resources (from Africa-Asia).
At any given time there seems to be technology that is easy to suck up and technology that is much harder to suck up. In the 19th century, anything with gears, levers and a steam engine could be absorbed, but more advanced chemistry and metallurgy were harder. Germany, for example, developed a lead in those areas back in the Middle Ages, and it is surprising how slowly the technology has leaked out historically. It's one thing to know how to use a technology, another thing to know how to advance it.
This is why so many US universities were founded in the late 19th century. There were too many new technologies in the world that the US couldn't absorb without them. It needed a better class of engineer. Technology ratcheted up in the early 20th century and again in the late 20th. If you want to build your own chip foundries or exploit mRNA medical technology, you need "too many" PhDs. Hell, P&G has a whole team of PhDs in various fields working on better disposable diapers, and you'd think diapers would be a mature technology. (I suppose they were high tech when they first came d'Ypres.)
This has impact on the US and global economy as well, as China is no longer "exporting deflation" as it did throughout the first two decades of the 2000s.
True!
I do not understand why the Chinese government would throw away its succession policy (critical for long- term stability) for someone with Xi’s record. It’s all cost with no apparent gain.
Some guys are just really good at taking over an autocratic system. Stalin was another example. Let's hope Xi doesn't get as bad as him!
Hey Noah. Amazing stuff as always.
What’s the counter argument? What’s the bullish case on China (if any).
Would you ever be up for writing one like that?
Sure. The bullish case is that industrial policy will succeed and that agglomeration effects will keep increasing the local market size for Chinese products.
I think readers are curious to hear what you think in the 10,20, 50 year US v China outcome. This is article is a big part.
I’m curious on what’s the China argument for why they win / how they win vs the US. More of the same? Or how much change is needed?
I'll tell you the bullish case sitting here in Hong Kong. They will basically have a whole bunch of people here and Shanghai and elsewhere looking to create everything in Wall Street + international supply chains so that they can then continue to support China's growth with it, in turn, going out investing elsewhere such that it becomes a MCGA economy leading to a two-horse, dumb, pointlessly annoying Cold Economic War with us Indians feeling the squeeze from both sides. Anyway, impossible to do more than one or five-year analyses right now. I'm with Noah. Let China enjoy its decade of austerity.
Not like anyone has told me any of this but I would think they will eventually get to the stage where they figure this out. It's all in Chinese, I'm sure. If the US Builds Back Better and gets better supply chains and it will weaken and crumble just like Soviet Union did. It's all gotta be sustainable
If I understood the background correctly, China’s growth in overall / per-capita wealth has been driven by resource mobilization / capital accumulation, but those growth drivers have hit diminishing returns, and the way forward is productivity growth. (And then your article explains the obstacles to said growth.)
Having never taken macro, I’m not sure what that actually means! :)
I read the Wikipedia entries for resource mobilization, capital mobilization, and productivity growth, and I don’t quite understand what they are exactly, or how they lead to growth in per capita living standards (presumably the goal of growth.)
It would be super helpful if you could provide concrete examples of each, and some intuition on the mechanism whereby they lead to (broadly shared) growth.
Absolutely. Will do. In the meantime, read about extensive vs. intensive growth!
Also- how dependent is western productivity on Chinese output?
Less than you might think. We spent a decade or so shipping jobs to China instead of having robots do them, but we're back to the robots now
Fascinating article, thank you!
Great article!
"that productivity growth had already well before 2016" ... could you add the verb? Thanks!
Yep!
I can't help but notice the difference in tone regarding Chinese innovation and dynamism between this blog and some Bloomberg writers.
This:
Adrian Wooldridge: "The institutions, practices and mind-set that enabled the U.S. to create a workforce capable of powering the world’s biggest and most dynamic economy are threatened by decay, disarray and disruption. And that is happening while China, a rival hostile power that poses an even greater challenge than the USSR once did, pulls ahead of it in world-defining technology. Once galvanized to action by the USSR’s launch of Sputnik, the U.S. now witnesses the equivalent of the launch of a dozen Sputniks from Beijing every year, with no corresponding response." https://www.bloomberg.com/opinion/articles/2022-02-04/2022-worker-shortage-u-s-needs-to-boost-top-talent-to-stack-up-to-china
Vs:
Noah: "But the quality of this research has been called into question. Investigations regularly find that despite all this publication activity and all this spending, Chinese universities are not the leaders in most fields of research. Basically, the story is that Chinese scientists are under tremendous pressure to publish a ton of crappy papers, which all cite each other, raising citation counts."
It's hard to say who is more accurate here. I'm leaning with Noah's take for now while taking the Wooldridge report as a warning to not fall asleep at the wheel either.
Slower working population growth should actually *speed* productivity growth, because of the need for improvements. It slows absolute growth of the economy, for bragging and military purposes, but not per capita. Otherwise, yeah, China has a lot of headwinds.
This explanation begs the question, are we investing enough in STEM education? I think not but mine is a superficial empirical view.
Good analysis. I had one question:
"Personally, I suspect these sources probably underestimate TFP growth (for all countries, not just for China)."
How do you determine that?
It's hard to measure TFP, and it is easy to underestimate it. TFP is the difference in production that is independent of increased capital spending and increased labor input. It's a secret sauce that involves restructuring processes, introducing new technologies and improving management and incentives. When it gets put into place it can seem to be a drag on productivity. It is only when the bugs are worked out, the process is absorbed, and production rises to match the new capabilities - something that might require price and market adjustments - that the new productivity appears in the measurements.
Two classic examples are the TFP in the late 19th century and during the Great Depression of the 1930s. The economy was restructuring and new technologies were being absorbed wholesale, but the TFP improvements were hard to see until decades later. Economists have long noted that they see computerization everywhere except in productivity figures, but we seem to be approaching a point of revision where the TFP changes become more obvious.
P.S. I've been reading about the food delivery problems in COVID threatened Shanghai, and one big problem is that Chinese people don't eat a lot of processed foods. They rely on fresh meats, fish and vegetables. Most households don't have 10 kilo bags of rice in their pantries like American preppers. There is no 7-11 warehouse full of beef jerky snacks and frozen microwave dinners as fuel the protagonists of so many zombie apocalypse movies. Think of the relative efficiency and robustness of America's agricultural system. Our crappy diet might not be good for us, but it is probably good for our TFP.
My paranoia says China could team up w/ Russia & corrupt regimes in Africa& east Asia to suck in technology (from Russia) & resources (from Africa-Asia).
Russia has jet engines but not much else in the way of super high tech
At any given time there seems to be technology that is easy to suck up and technology that is much harder to suck up. In the 19th century, anything with gears, levers and a steam engine could be absorbed, but more advanced chemistry and metallurgy were harder. Germany, for example, developed a lead in those areas back in the Middle Ages, and it is surprising how slowly the technology has leaked out historically. It's one thing to know how to use a technology, another thing to know how to advance it.
This is why so many US universities were founded in the late 19th century. There were too many new technologies in the world that the US couldn't absorb without them. It needed a better class of engineer. Technology ratcheted up in the early 20th century and again in the late 20th. If you want to build your own chip foundries or exploit mRNA medical technology, you need "too many" PhDs. Hell, P&G has a whole team of PhDs in various fields working on better disposable diapers, and you'd think diapers would be a mature technology. (I suppose they were high tech when they first came d'Ypres.)
Really? North Korea? I thought it was mostly just people going to their jobs and having average lives. But yeah the industry was pretty basic.