Predicting China's Long-Term Growth Rate is more of an Art

Reading the latest Chinese growth forecasts to 2050 brings to mind Karl Marx’s aphorism that history repeat itself first as misfortune, second as farce. One of the co-authors, the Yale economics professor, told the Financial Times the ‘main point of our findings is that, contrary to common misconceptions, efficiency growth under Mao, particularly in the non-agricultural field, was actually pretty good’. But this is no argument to return to Mao-era policies, which may be a tragedy for the Chinese economy. Moreover, using Mao-era productivity trends to project Chinese GDP up to 70 years later, leads to farcical conclusions.

This is really a shame, because the first 55 pages of the National Agency of Economic Research (NBER) working paper provide a forensic account of Chinese multi-sector productivity growth from 1953 in order to 2012. Only in the of course ‘speculative’ section are these historic trends extrapolated out to the 2050s. According to reform-era (post-1978) productivity trends, they task China’s average growth till 2024 at 7.8 %, 5.2 percent during 2024–2036 and then 3.6 percent during 2036–2050. A reversion to Mao-era (starting after the Great Leap Forward) trends would see 5 percent till 2024, 4.6 percent during 2024–36 and then 3.9 percent.

There tend to be three big problems with these projections.

First, the Mao-era economy might grow relatively faster following 2036, but it would also be one-third smaller than the reform-era scenario. The writers assume that China’s total element productivity growth rates automatically converge upon US trend following reaching 70 percent of US efficiency levels. Because the reform-era economy develops faster, it hits this particular slow-down threshold earlier while the Mao-era situation is still picking the well known ‘low hanging fruit’. Mao-era productivity development might then seem very good, but reform-era growth is still much better.

Second, despite the authors’ care with historic statistics, they completely ignore the introduction of the one-child policy at the beginning of the reform era. These people assume labour force development of 0.5 percent annually, based on the ‘lower end’ of China’s populace growth until 2012. But the United Nations’ World Population Prospects projects China’s workforce to contract by 0.4 % annually until 2025, and by about 1 percent annually thereafter. Correcting this would knock a few percentage points off either situation.

The third, and fatal, flaw to the projections is the underlying model. The authors assume that regardless of the policy regime chosen, Chinese workers eventually become as productive as American workers. The choice of historical scenario turns into a simple choice of which parameter to make use of to extrapolate future growth. Under these assumptions, institutional choices simply don’t matter. This really is the kind of naïve ‘Asiaphoria’ that Lant Pritchett as well as Larry Summers warned of in 2014 in their own NBER paper.

More careful projections, such as those through the Australian Treasury, estimate productivity potential using a rough measure of current institutional quality. In this model, work productivity only reaches US levels if the economy is actually underpinned by US-quality institutions. A country with less developed economic institutions can still experience some rapid growth, but only until it reaches its lower degree of potential as determined by it’s institutions.

It was because The far east was still so desperately poor in the 1970s that the authors were able to find ‘pretty good’ productivity growth in the Mao era. This is because Mao-era institutions provided superior economic conditions than what had prevailed throughout the preceding civil war as well as Japanese invasion. But while per capita income — carefully tied to labour productivity — in China grew before The late seventies, it was still less than double the level of the Ming dynasty a few six centuries earlier.

After The late seventies, the experimental introduction of private property, open markets, and also the political acceptance of entrepreneurs gradually expanded China’s effective potential. Since reform and opening up began almost 40 years ago, Chinese per household income has doubled roughly every eight years. This now surpasses the Ussr at its peak. And using the Global Competitiveness Index like a proxy for institutional quality, China still has good institutions relative to its current productivity amounts. This leaves some space for more catch-up growth.

But China needs improved governance and continued reform if it is to become a high-income nation. This is what it would take therefore China could avoid the ‘center income trap’.

The Chinese edition of the Financial Times reported the growth projections under the headline: ‘Over time, Mao-style policies could bring The far east higher growth’. This is a farcical policy implication. At best, a reversion in order to Mao-style policies might reduce earnings inequality, but only because Chinese would be more equally poor.

If Mao still ran China, China would still be poor is republished with permission from East Asian countries Forum