Is China Slipping into the 'Middle Income Trap'?

[Benjamin Frank]

Who could tell? China's economy is best described as 'state capitalism' and, at present, it seems that in the highest revenue generating industries the Chinese government isn't interested in having businesses maximize profits, but maximize China's influence in the world. In other areas of their domestic economy, the Chinese government seems to be primarily interested in keeping their population satisfied.

Beyond that, the Chinese economy has the problem of the 'one child policy' being maintained by the government for too long, which is also obviously also a governmental caused issue.

There are other problems with the Chinese economy that are more inherent to their economy and not caused by their government, but how can they be disentangled?

My overall point is that, obviously aside from the effects of the 'one child policy' which is too late to change, with different government policies that are genuinely free market (I.E seek to maximize profit, but legally unlike in the United States), the Chinese economy could look very different.

[Benjamin Frank]

Is it even possible for a nation which truncates the free flow of information because of its authoritarian/totalitarian tendencies to achieve a first world economic status and income? Has that ever happened before in the post war period as economies became more information based and agile and supple?

South Korea was a military dictatorship and Taiwan an authoritarian one-party state with permanent martial law when they made the transition to a first world economy.

There was a theory in economic circles at least in the 1980s that it took a dictatorship to develop an economy because they didn't have to worry about trying to please every interest group.

[Benjamin Frank]

Is it even possible for a nation which truncates the free flow of information because of its authoritarian/totalitarian tendencies to achieve a first world economic status and income? Has that ever happened before in the post war period as economies became more information based and agile and supple?

South Korea was a military dictatorship and Taiwan an authoritarian one-party state with permanent martial law when they made the transition to a first world economy.

There was a theory in economic circles at least in the 1980s that it took a dictatorship to develop an economy because they didn't have to worry about trying to please every interest group.

I still personally ascribe to a watered down version of this theory. I don’t think it “takes” a certain path but I do believe certain paths make it easier.

I believe the “ideal” progression is true state-socialism (in cases where the necessary basic infrastructure for any economy is not existent) to an authoritarian capitalism/liberalization of the markets but not necessarily political freedoms to a very liberal state (both politically and socially) to a social democracy. But I’m not an economist so this is some layperson speaking.

Believe it or not, I kept all my school papers including back to elementary school, and since I just moved, I know where all the stuff is.

This was a sample essay question from high school history from 1988:
"With reference to at least one developed and one developing nation, outline the problems and growth of liberal democracy."

This is the quote from the article that referenced dictatorships and economic growth.

From: Post-election Brazil, a Victory for Democratization by Patrick Doyle (1982)

"It is useful to recall that when the military came to power in 1964 its thinking, largely molded by existing conditions, was dominated by two concerns - national security and economic development. The two priorities were not unrelated. The national development plan was highly dependent on substational inflows of foreign capital and this in turn necessitated a stable political and investment climate. Decision making became highly centralized and power was increasing concentrated in the executive branch. A number of Institutional Acts were passed which, among other things, granted presidental authority to suspend individual political rights, remove public employees from their positions, recess Congress and override electoral decisions at all levels.

These Acts and the concept of national security - so broadly defined as to encompass almost any form of political dissent or criticism as a breach of security punishable by up to 30 years inprisonment or death - made Brazil one of the most quietly repressive political systems in Latin America. This accelerated move towards highly centralized political power and the growth of repression during the early years of military rule was aided tacitly at least, buy a supportive, representative coalition formed in the early 1960s. The various elements were willing, initially at least, to accept the altered system and repressive military regimes, in return for law and order in the streets and the benefits of renewed economic growth.

The argument that at a certain stage in a country's development a strong, highly centralized, authoritarian regime is best suited to take the nation to a 'take off' point and to maintain order as an essential element of the process is a plausible (if not agreeable) one in the Brazilian case. There is no question but that the military (or military dominated) system that has governed Brazil for the last 18 years has maintained public order, created a stable economic environment and an attractive investment climate, brought about remarkable economic growth and has been responsible, through this development process, for making Brazil a dominant regional power and an emergent power in global terms.

There is, however, an aura of fatalism surrounding such a system. If it fulfills the role for which it was created, that system becomes an anachronism, and in an ideal world would self destruct. It is axiomatic that as a society develops and modernizes it becomes increasingly more complex...Authoritarian regimes, especially those entrenched in power for some time, tend to lack the adaptive capacity required to cope with drastically altered demands."

[Benjamin Frank]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

I think you need to get over the tired drumbeat that less regulations are inherently pro growth. I certainly don't disagree that the regulatory framework needs to be looked at in totality and not just separately, because the overall burden can be expensive and time consuming which provides a strong disincentive for investment.

However, there are also many examples of under-regulation resulting in such things as invasive species, (slightly) brain damaged children (lead in gasoline), banks gambling with other people's money (or simply stealing it) such as the Savings and Loans of the late 1980s and the sub prime mortgages of 2008 and general externalities that pass off expenses to the public at large and to other businesses, all of which are damaging for an economy (among other damage.)

[Benjamin Frank]

No, China still has fewer taxes, regulations, and a smaller welfare state than the US. This is indicative for a faster growth environment. Contrary to conventional wisdom, deflation is a good thing - it means a lower cost of living for everyone. We had a lot of deflation in the late 1800s, when our innovation and growth were the fastest.

It is possible that Xi Jinping could screw things up - he implemented extremely authoritarian COVID lockdowns for example which have slowed the economy for the last 2 years.

It's hard to have a lot of growth if your population is falling, and I think in practice China is much more regulated -- in the sense that local governments are empowered to take very authoritarian actions against enterprises they dislike -- than the United States.

Have you seen DeSantis? It isn't just China being regulated at the local level. In any case, local regulation is much better than federal, in that there is competition where businesses can move if they don't like the current locality.

Also, what matters more is living standards, which doesn't matter much on population (although a higher population could mean more innovation). Monaco has a small population but high living standards.

I was going to leave this for Vosem to respond to, but Vosem doesn't seem to be interested.

Just a couple general points, not specifically about China.

1.Regarding businesses moving: it depends on the type of business. It does happen occasionally, but moving a manufacturing plant is not easy. What usually happens is a firm expands elsewhere while letting the present facility run down. Retail outlets are often location specific. The easiest businesses to relocate are in the service sector.

2.The problem of lower population isn't necessarily having a lower population, it's in the transition of the decline. It can result in labor shortages if there is a problem of fewer young people replacing retiring workers. The teaching of economics in college tend to overlook transitory stages. Of course, there is also the cliche of businesses needing growing markets, which there probably is some truth to.

3.Real economic growth per capita was higher in the 1900s than in the 1800s. According to measuringworth.com real GDP per capita in 1801 was $1,611.8 using constant 2012 U.S $, and ended the century at $6,303.9. A 3.91 times increase.

While real GDP per capita went from 1901 of $6,511.0 to $46,523.0 at the end of the 20th Century, a 7.15 times increase. So, the 20th century having greater real economic growth than the 19th century is not even close.

I don't know what role inflation or deflation of the 19th century played in the slower real economic growth, but I'm sure one problem was that the U.S was on the gold standard then, so inflation was sparked by discoveries of large gold deposits (which have little to nothing to do with how the 'real economy' was doing) while deflation was caused by real economic growth not supported by any gold finds. (The gold standard is truly idiotic.)

While it is true that the overall century was deflationary, with the annual deflation rate of -0.42% for the century, not surprisingly there were wild swings. In 1802 for instance, the deflation rate was -15.73%, while in 1803 the inflation rate was 5.49%. I'm sure there is some error rate in these numbers since they had to be calculated from data sets compiled years later. Of course, the present inflation rates (CPI or GDP price deflator) also have error rates, but at least they use data sets compiled currently.

Edit: I see you mentioned 'late 1800s' not '1800s' for economic growth. Real GDP per capita was $4,329.3 in 1880 and, again, $6,303.9 in 1900.

Using a financial calculator with N=21, PV=4,329.3 FV=6,303.9 shows real GDP per capita of 1.9% per annum. Real GDP per capita from 1901 to 2000 was 2.01% per annum. The annualized deflation rate from 1880 to 1900 was -1.03%.