To rule a country of a thousand chariots, there must be reverent attention to business, and sincerity; economy in expenditure, and love for men; and the employment of the people at the proper seasons.
--- Confucius
A strong economy is a prerequisite for a country to achieve greatness. China certainly have come a long ways after Deng took over in the seventies. The question is, will they continue and how far would they go?
Regarding the future development of China's economy, there are two schools of thought. The optimists point to the big discrepancy between the per capita Chinese GDP and the West in general and United States in particular and say that there will be more convergence. The pessimists, exemplified by Peter Thiel, say that globalization has run its course and the Chinese will have a harder time converging with the West. Who is right?
To go down that rabbit hole, I would like to explore a different but related topic. Today, the U.S. GDP per capita is at $57000, one of the highest for any normal economy. By normal economy, I am excluding a few city states like Singapore and Luxembourg since their status as wealth heaven or as a port city/financial hub cannot be replicated by a normal country without this unique niche to exploit. What we are talking about here is economic development as opposed to pure economic growth. Economic development refers to the production of ever more sophisticated goods in increasing quantity. So the Saudis, after they discover oil, had a lot of economic growth, but very little economic development. There is no secret to how we achieve this level of GDP. All the practices of the United States are opened to all countries that wish to study and emulate it. Globalization was supposed to spread these best practices of the world from the developed world to the rest. So one would expect that the developing world to converge to the productivity and living standard of the leader, the United States.
The problem, to paraphrase Greg Cochran, is that this convergence did not bother to take the trouble of actually happening. In the developed world, all the major economies like France, Germany, Japan only achieve some 70% of the American per capita GDP after all these decades. In case you retort that they will catch up in the future, their GDP growth have lagged behind that of the United States for decades now and show no sign of catching up. The next tier down, the Koreans and the Taiwanese, are similarly stuck, but at a lower level. These are the lucky ones. You would think a country like Ethiopia, which produce $600 worth of GDP per capita on currency exchange bases, would be able to produce something of value. The knowledge to make, say, a bicycle, could be downloaded from the internet for free. Capital flows across the world to where money could be made, yet these countries failed to make the most basics of industrial goods long after the knowledge of the industrialization has spread to other parts of the globe.
There are many who come up with arguments for why this is the case, but no one has come up with a satisfactory explanation. Some argued that exports, such as the ones associated with the Four Tigers is what lead to economic development and growth. Indeed, for a desperately poor nation, exporting their labor is the first step in joining the world economic order. Many nations today like South Korea and Germany are still heavily reliant on export for their economy. On the other hand, there are many nations that, while at one point or another, relied on exports, have relatively small proportion of their economies as exports during most of their development. The U. S. is a case in point. we were never an export powerhouse before WWII. We shot up in the fifties as an export nation after Europe was exhausted from the war. Today, export is merely 13% of the U.S. economy. On this count, with exports accounting for only 19% of the economy, China is actually closer to the United States than to South Korea. The point is, export is not needed to sustain high economic development. Exports are nevertheless very crucial to the initial development of a nation that started out desperately poor. In the process of exploiting the cheap labor of the country, outsiders, motivated by profit, have brought in the latest technology and best practices. Indeed, this is how all the East Asian countries such as Japan, South Korea and China started their economic ascend.
Since various countries are stuck at different points in their economic development, we must conclude that it is not enough to just learn about the production of widgets, or even the best practices of corporations. To become as productive as the United States, a country must have other qualities that the United States possesses. In the next post, I will outline what I believe to be the most important factors contributing to the success of the United States. I will also compare how the Chinese stack up on these factors.
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