China: Not About to Bury Us?

Brian Doherty | November 16, 2007

Interesting bit a couple of days ago in the Financial Times for lovers of macroeconomic stats and their curious evanescence, and those watching for the next big threat on the geopolitical horizon. An excerpt:

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated.

.........

Why such a large revision in the estimates of China’s economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

The World Bank’s estimates based on summary data from the late 1980s probably overstated China’s PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.

40 percent off! Good enough for bloated international economic institution work, I suppose.

Hat tip: Bryan Caplan's Econlog.

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|11.16.07 @ 12:59PM|#

Not to sound like John Edwards, but from my understanding there are "two Chinas". There are the big cities, which have a large middle class and life expectancies approaching those of developed nations, then theres the countryside which is pretty much the same as it was in 1960.

|11.16.07 @ 1:11PM|#

Plus, their stock market is experiencing a bubble that makes the American market in 1929 look sound and stable. All kinds of reported values in China are absurdly inflated, so I think it's tough to compare any of their reported figures for business and economic performance to Western results. No doubt a lot of real value has been created. But there's a lot of fantasy too. And some rough adjustments are ahead.

|11.16.07 @ 1:36PM|#

|11.16.07 @ 1:37PM|#

The PRC is going to have some excruciating growing pains as they try to develop a first world economy while maintaing an ad hoc legal system. It will be interesting and frightening. If somebody were to predict the planet's third nuclear attack is going to be a Chinese internal matter, I wouldn't scream nutcase at them. It's not going to be pretty in any case.

Russ 2000|11.16.07 @ 1:40PM|#

The rest of the world wasn't buying USSR-made consumer items (unless one counts machine guns as consumer items). The rest of the world IS buying Chinese-made consumer items, so the figures are more reliable. I wouldn't doubt the Chinese figures are inflated, but not to the Soviet extreme.

|11.16.07 @ 1:45PM|#

So I gather that, instead of China's last couple decades marking the greatest reduction of poverty of the greatest number of people in history, we now only have China's last couple decades marking the greatest reduction of poverty of the greatest number of people in history.

technomist|11.16.07 @ 1:52PM|#

I don't think they will bury the US. Why bury what you have bought?

The development bank can say what they like, you just have to drive around places like the Dalian Peninsula to see the massive strides the Chinese have been making. It is a truly awe-inspiring achievement.

|11.16.07 @ 1:53PM|#

After the fall of the U.S.SR. many were shocked,shocked I tell you,the government figures for their economy[and C.I.A. figures] wrer so off mark.A brutal,repressive gov. lying about the welfare of it's people?How were we to know?

I've known people who have lived in Shanghai and Beijing. At least in the big cities, people don't queue up around the block to buy toilet paper and bread. So I doubt the Chinese economy is like the Soviet Union.

|11.16.07 @ 1:55PM|#

technomist|11.16.07 @ 2:03PM|#

Cesar -You are right not to doubt the Chinese economy is nothing like the Soviet Union. Its much more like the American one, only modern and dynamic.

|11.16.07 @ 2:06PM|#

Cesar -You are right not to doubt the Chinese economy is nothing like the Soviet Union. Its much more like the American one, only modern and dynamic.

In the cities, sure. In the countryside, its feudal. But thats really nothing new, industrialization always happens on the back of people in the countryside.

|11.16.07 @ 2:13PM|#

Yes, I am going to tell a survey taker how much I make and how many assets I have.

No cadre will ever come & take my stuff or fire me and give my job to one of his relatives, right?

technomist|11.16.07 @ 2:20PM|#

The countryside is backwards in some places and prosperous in others. These contrasts can be seen in many parts of the states where there are plenty of pockets of grinding third world poverty. You don't expect the world to judge the US economy as a whole by these or use these as the sole examples of the standards of living or access to education, health services etc that Americans as a whole as a whole enjoy. Large parts of the Chinese middle class is enjoying comparable life styles to that in America. Numerically, they possibly out-number the American middle class already. I have been to China a lot over the past 10 years. The facts on the ground; the huge development of the cities and their hinterlands, the railways, roads, shipyards, power stations, factories and businesses; these are not a mirage. If you want to find solace in the hope that it will go away, do so by all means, but the Chinese now own a big chunk of your nation's future and should not be underestimated.

|11.16.07 @ 2:22PM|#

industrialization always happens on the back of people in the countryside.

That's an odd thing to say. Rather, I would say that industrialization happens behind the backs of people in the countryside. Their lives don't generally get worse in absolute terms unless they utterly fail to adopt to changes within the countryside itself -- changes such as more valuable crops or more efficient agricultural methods.

Their lives certainly don't improve nearly to the extent of those who move to the cities, and even an expanding industrial economy can absorb only so many new workers at a time, but I think it's a mischaracterization to say that the new industrial world is built at the expense of the old agricultural world.

Theres third world poverty in Appalachia, sure. But the vast majority of the American population lives in urban areas. In China, the majority still lives in rural areas. This makes rural poverty a much bigger problem there than it is in the United States. There is already a lot of resentment in the countryside that they are being left behind.

the Chinese now own a big chunk of your nation's future and should not be underestimated.

If you're referring to the canard that they own most of our national debt, they don't. Most of its owned by those scary British and Japanese.

|11.16.07 @ 2:24PM|#

That's an odd thing to say. Rather, I would say that industrialization happens behind the backs of people in the countryside.

Their lives are disrupted because they are pushed out of the countryside and into the city (think enclosure in Britain, collectivization in the Soviet Union) and this is very rough in the short term. In the long term, its a clear benefit though. Its just getting through the initial upheaval that is the tough part.

technomist|11.16.07 @ 2:28PM|#

Of course the scary Brits have bought some of your debt, just as US corporations have bought a lot of ours, more fool them. There is nothing wrong with China having the huge holdings they do. What is important, though, is the trend and influence it buys.

|11.16.07 @ 2:32PM|#

There is nothing wrong with China having the huge holdings they do. What is important, though, is the trend and influence it buys.

I'm actually happy foreign countries own our debt, it will stop us from doing anything really stupid towards them in foreign policy.

Heres a pie chart of who owns the debt, btw. The way demagogic politicians talk you think the mainland Chinese own 60% of it, but its just not true.

|11.16.07 @ 2:33PM|#

I'm not scared of the Chinese (or the Indians, or Latin Americans) industrializing and developing, by the way. The more people that are lifted out of poverty and the more developed countries we have, the better it is for everybody.

|11.16.07 @ 2:35PM|#

I'll buy that legal changes in long-standing land utilization practices are tough on those in the countryside. But is it actually fair to characterize this as a necessary implication of industrialization? Isn't it rather a collateral effect of the politically connected having more wealth due to industrialization?

Secondly, is China experiencing forced relocation of peasants, aside from the filling of valleys with reservoirs and the like?

|11.16.07 @ 2:37PM|#

. But is it actually fair to characterize this as a necessary implication of industrialization? Isn't it rather a collateral effect of the politically connected having more wealth due to industrialization?

Its happened in the indsutrialization of every country. Productivity improves in the agricultural sector due to new technology, which pushes peseants into the cities where they become factory workers. It can be done by the free market as in the west, or artificially as in the Soviet Union.

Secondly, is China experiencing forced relocation of peasants, aside from the filling of valleys with reservoirs and the like?

Actually, I think they want to restrict the flow of peseants into the cities right now.

technomist|11.16.07 @ 2:39PM|#

Thanks for the link. Where I worry is that this is a state with no ideology left but populist nationalism, and, as J Sub D points out, an ad hoc legal system. There are no or few democratic political credentials to back it up,so this modern Chinese state is going to be a difficult animal to deal with in the long term unless it is very well understood and treated with due respect.

|11.16.07 @ 2:44PM|#

Where I worry is that this is a state with no ideology left but populist nationalism, and, as J Sub D points out, an ad hoc legal system. There are no or few democratic political credentials to back it up,so this modern Chinese state is going to be a difficult animal to deal with in the long term unless it is very well understood and treated with due respect.

I think one of two things happens. As China industrializes, its reformed from the top down and becomes more democratic in the vein of South Korea and Taiwan. Thats the best case.

The worst case is its becomes Singapore writ large. A free, wealthy and industrialized economy inside an authoritarian political and legal system.

|11.16.07 @ 2:47PM|#

From what I understand, while a good chunk of China is still rural and poor, the gains made in these areas are even greater than the cities, both in breadth and percentage. Granted you're starting from an incredibly low baseline, but the reforms made in the eighties in the rural areas are what kick started the whole current business.

The challenge now is that the three pieces of low hanging fruit (rural farmers able to sell their crops, small town artisens able to sell there wares, and the general populace able to accumulate captital) are basically played out. You're now in an equivalent of a gilded age, atlhough not necessarily a bad thing. But it it will take foresight to maintain the current growth dyanamic via legal reform and sustaining produtivity increases. Hopefully, these are part of a natural evolution, like they were in 1880-1900 america, but it may not be inevitable.

|11.16.07 @ 2:49PM|#

Productivity improves in the agricultural sector due to new technology, which pushes peseants into the cities where they become factory workers.

Yes, there is a push. But this effect in and of itself is neither "force" nor detrimental to their absolute standard of living.

As the economy industrializes, each acre of land produces more wealth. The same number of peasants can be supported on the same number of acres at a slightly higher standard of gut-wrenching poverty. Their choice to stay in the countryside marks an improvement over the old agricultural economy. And their choice to move to the city, should they take it, marks an improvement over the old agricultural economy.

Thus those in the countryside are better off due to industrialization except for, as I noted above, their need to pay attention to keep up with their neighbors.

|11.16.07 @ 2:50PM|#

Sure the Chinese are advancing, but if you get out of the Shanghais and the Beijings, it's not quite the story you read in the papers. For one, there's still a billion people in the West that aren't even touched. This is like judging the economy of the US based on the goings on of the California economy. Also, they're using the old Soviet control of inflation, by denying it exists and price controls.

Seeing as China owns less than 10% of our debt, they hardly "own" us. If anything we "own" them more because of how much of their industrial production is tied to buying stuff from them.

China has a big political problem on their horizon between a billion people left out of their economic boom that were indoctrinated with Maoist beliefs of equality. Add that to the fact that the inflation piper will have to be paid and trouble's a brewin'.

technomist|11.16.07 @ 3:00PM|#

What happens when part of the country is subject to what is an attempt at the your top down reform model which is only partially successful and other parts follow a Singapore path? Chaos. The biggest fear they have of all given the last two hundred years of history (actually the last three thousand is the break up of central authority). Its not for nothing that after talent shows, game shows and boring documentaries about the Long March, Chinese TV is full of historical dramas which subtly remind people about how bad things were during the period of the warring states. Possibly this is a clue to why they have been so very achingly cautious about political reforms.

Syloson of Samos|11.16.07 @ 3:05PM|#

MikeP,

Pretty clearly industrialization in some countries was done "on the backs" of the agricultural sector of the economy. That was so in the USSR in the 1930s. The government basically used the foreign capital from the sale of agricultural goods as a means to pay for rapid industrialization. They did so in such as to dramatically reduce the nutritional intake of those in the countryside.

Also, Britain's commercial and then industrial rise up to the 19th century in part coincided with the forced displacement associated with the enclosure movement.

Now, whether these sort of events are "required" of industrialization is another matter.

R C Dean|11.16.07 @ 3:09PM|#

They were actually very good at producing things very efficiently.

Er, not really. Soviet-bloc quality was famously crappy, and the reported volumes of output were hugely inflated.

The Soviet economy was a shambling hulk of non-productive inefficiency.

R C Dean|11.16.07 @ 3:12PM|#

There is nothing wrong with China having the huge holdings they do.

Hell, the more of our debt they hold, the more they stand to lose if we tank.

I've never understood why anyone believes holding US Treasuries gives you any leverage on the US. Its not like you foreclose on the notes, or accelerate them, or really do a damn thing to enforce or collect on them.

|11.16.07 @ 3:18PM|#

No disagreement, Syloson of Samos.

technomist|11.16.07 @ 3:26PM|#

Being a major buyer of T bonds makes it harder for the US gov't to force revaluation of the Yuan?

|11.16.07 @ 3:32PM|#

One is reminded of the phrase, "unsecured debt".

China is totally dependent on us. We are not all that dependent on China--not beyond the short term, anyway. There are any number of countries who'd like to take over the cheap labor champ position. And will, if and when China actually becomes affluent and. . .wait for it. . .won't have such cheap labor anymore.

technomist|11.16.07 @ 3:32PM|#

They buy T bonds because they may actually not want your country to fail through unstable interest rates? Spread risk away from holding only Eurobonds?

|11.16.07 @ 3:38PM|#

Soviet-bloc quality was famously crappy

What I wrote is only reinforced by this observation.

and the reported volumes of output were hugely inflated.

Got a cite? The Soviet Union's output numbers measured production -- i.e., how much product came off the line. By my understanding these numbers were accurate.

The shock was that these numbers do not measure actual value. Put simply, the Soviet output numbers were based on the labor theory of value, not the subjective theory of value. Thus they vastly overinflated true value.

The Soviet economy was a shambling hulk of non-productive inefficiency.

Economic inefficiency, yes. Factory efficiency, however, was well tuned to meet their (deranged) target production output numbers.

Paul Craig Roberts has an article on the topic: "My Time with Soviet Economics"...

The emphasis on growth rates was one way of avoiding the question of what the
growth rates were measuring. Much of Soviet output related very poorly to use. Inputs often were combined to create outputs worth less than the inputs. It is not genuine industrialization to construct capacity embodying production functions that produce outputs worth less than the inputs. The pitiful income per capita in Russia today reflects seventy-five years of wasting resources.

The Soviet Union wasted its resources because the success indicator for Soviet managers allowed them to be successful even though their output was poorly related to the needs of users. Soviet output basically satisfied no one but the statistician measuring
it.

|11.16.07 @ 3:45PM|#

To be fair to the USSR, their numbers may not have been inflated. They were actually very good at producing things very efficiently. After all, they had five-year plans telling their factories exactly what to produce. They could therefore utilize their inputs very well...

I'll spare you a tedious lecture on the socialist calculation debate and just tell the following story (told to me as true, by one of my economics profs, a German himself).

Just after reunification, a West German took over an East German factory, which produced I forget what. The East Germans were competent, well-trained, and glad to still have jobs, so they worked hard for their new boss.

Too hard, it seemed. What our manager expected from his Ossi employees from a full day's work was nothing more strenuous thanhe'd hae expected from "Wessis." But it seemed to be back-breaking for them. They complained of exhaustion; their love for their new boss soon evaporated. Our manager had no idea what he was doing wrong--until he overheard one of his employees grumble, a bit too loudly:

"Jesus! Don't they _ever_ have shortages under capitalism?"

Because, it turned out that in the old days, on a typical eight-hour shift the Ossis had been lucky if they'd been able to work for half of that. The rest of the time their production line sat idle for shortages of one part or another. The rest of their time they spent loafing around, smoking, playing cards, shooting the breeze, working on their Trabis in the parking lot, getting drunk...In short, through no fault of their own they'd never had the chance to put in a full day's work in their lives.

In other words, the GDR, in its day the most prosperous socialist country of them all, was not very good at producing things efficiently, and didn't utilize its inputs very well at all.

ed|11.16.07 @ 3:52PM|#

He sees you when you're sleeping.
He knows when you're awake.
He knows if you've been bad...
then he delivers a bag of Chinese toys.

technomist|11.16.07 @ 3:54PM|#

And if you've been bad, its a lump of Chinese coal.

|11.16.07 @ 4:05PM|#

Good new cuz we can kick international governments in the nuts.

Bad new cuz a rich China makes everyone better off.

In other words, the GDR, in its day the most prosperous socialist country of them all, was not very good at producing things efficiently, and didn't utilize its inputs very well at all.

I do not disagree that the socialist countries were massively inefficient by the economic definition of efficiency.

But the individual factory was "efficient" at turning input into output. I don't count those times that the input wasn't present against the factory's efficiency. Nay, the fact that they only worked a few hours a day due to input shortages is indicative of high factory efficiency at turning what input was there into output.

As one example, Russia builds better rockets at wildly lower cost with significantly less labor than the US because of the attention they have historically put into factory efficiency and automation. Rockets was an area where the buyer (the military) had the money, the interest in quality, and the clout necessary to make the true output value somewhat close to the subjective value. Other industries weren't so fortunate...

|11.16.07 @ 4:08PM|#

Its much more like the American one, only modern and dynamic.

Actually, the Chinese economy is exactly like the American one, except no laws are enforced.

Russ 2000|11.16.07 @ 4:20PM|#

Actually, the Chinese economy is exactly like the American one, except no laws are enforced.

Which explains its gains.

|11.16.07 @ 5:21PM|#

Incidentally, I hope no one thinks I am fond of the USSR or its econometrics. It simply presents an excellent lesson that what one measures is at least as important as the numbers one gets. Most particularly, measures of production output do not necessarily indicate the well being of the people at all.

The economic "miracle" of 1930s Germany and the "recovery" of the US economy during World War II are two other examples where economic metrics did a poor job of measuring the well being of the populace. Economies find it much easier to produce military hardware for a multi-year government plan than to divine what consumers want in the next six months. Furthermore, the price of product ordered by and delivered to the government is generally equal to the costs of the inputs. In contrast, product sold to the consumer must find value independent of the costs of the inputs.

The Soviet Union, where there was not even the attempt to put prices on inputs and outputs, built illusion upon illusion until the stated value of the outputs they were measuring was completely divorced from their actual value. No lying was required.

|11.17.07 @ 7:32AM|#

"...As one example, Russia builds better rockets at wildly lower cost with significantly less labor than the US ..."

Lower cost, yes I suppose I will agree with that. Less labor, and "better", I have a problem with that. I used to think you were an economist, MikeP. Now, I realize that you are Thoreau's mad alter ego.

|11.17.07 @ 8:43AM|#

wayne,

Admittedly, that was an expert opinion from ten years ago. Since then there's been a proliferation of privately funded rockets in the US, so things may have changed.

But what I said is only to be expected. In the US, the two tendencies that would lead to less efficient rocket production are (1) the ossification of government contracts with the big-name aerospace companies and (2) the realization by those companies that under government cost-plus acquisition rules they have little incentive to lower costs.

In contrast, in a communist system where people elsewhere in the economy are effectively starved to make sure the rocket manufacturer has the inputs it needs, and the metrics of success are based on the quality use of those inputs, there is more incentive to be more efficient.

And these economics tend to push the respective solutions: US rockets are finely tuned instruments built on the leading edge of technology to eke out every scintilla of performance from their components. Russian rockets are dumb, heavy boosters. It may be only an accident of engineering that, at least at this point in the history of rocketry, the latter has proven to be cheaper for the equivalent performance.

|11.18.07 @ 1:31AM|#

Russia builds better rockets at wildly lower cost with significantly less labor than the US

You're kidding, right? This is based on "expert" opinions?

Remember that "expert opinions" assured us that Saddam Insane had all kinds of nasty stuff in Iraq. Except that we've never quite found any of it.

Reality is more like, the Soviets can build a few of anything. They have never been good at producing anything in quantity and simultaneously maintaining quality.

I'd be very, very surprised if rockets/missiles/etc were any different. You may not realize it, but you're talking about an exceedingly difficult market segment to work with. Keeping quality up on the production line for these kinds of things is very difficult because -- production sizes are not tiny (one to three), but they are are also not 10,000 and up. So you can't justify the tooling costs for mass production.

You end up with a bastardized production line (bastardized in the sense that you cobble together whatever production techniques you can, in order to build a few hundred of something).

This is hard for Americans, and I am sure it was much harder for the USSR.

Take it from someone who's worked in aerospace, I am intimately familiar with these production problems.

People (congress, DoD, NASA, etc) bitch about cost here in the US, but they don't get it. If you bought 100,000 Saturn V rockets to put satalites up, sure we could get the unit cost down. But if you buy just 100 of them, well, that's going to be a different story.

|11.18.07 @ 4:18AM|#

My impression of expert opinion comes from reading a decade and a half of sci.space newsgroups. There was a strong consensus there of people, many of whom founded or entered private rocketry concerns, with opinions on costs of US versus Russian rocket design, manufacture, and operations. They were not experts in Iraqi WMDs.

I'd be very, very surprised if rockets/missiles/etc were any different.

Indeed, rockets seem to be the biggest exception -- perhaps because rocket engineering is difficult, but also because the main buyer even in the capitalist system has historically been the government.

You may not realize it, but you're talking about an exceedingly difficult market segment to work with.

The more reason to allow that it may form an exception to the generally shoddy quality of Soviet goods compared with American goods.

Keeping quality up on the production line for these kinds of things is very difficult because -- production sizes are not tiny (one to three), but they are are also not 10,000 and up. So you can't justify the tooling costs for mass production.

The US answer to this problem? Extremely tight tolerances to lower material costs and extremely complex design, manufacture, and operations to guarantee that the tight tolerances are not violated.

The Soviet answer to this problem? Loose tolerances, and to hell with material costs. You will save manufacture and operations costs in the long run by designing it bigger and tougher to begin with. You can use existing production rigs and factory floors and require no clean room. Everything about manufacture becomes cheaper, and automation can be thrown at the problem much more readily. Indeed, the repeatability of automation itself may make later operations cheaper by guaranteeing uniformity without requiring extensive quality tests.

|11.18.07 @ 10:20PM|#

I can state with some authority here on the rocket matter, since I was involved in the US and Japanese space program and heard a great talk on this very matter from Oberg (the top Soviet space expert). The major difference was the USSR decided they didn't have to advance that much beyond 1940s technology. They built with a lot of metal, could ship the parts around on freight cars, and slap them together at the launch site.

By comparison, the US went for high-precision engineering and very tight tolerances. A standard Atlas would collapse under its own weight if the fuel tanks weren't filled.

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