China's Economy to Grow to $123 Trillion by 2040

[Psychic Octopus]

$123,000,000,000,000*
By Robert Fogel

http://www.foreignpolicy.com/articles/2010/01/04/123000000000000?page=0,0

Read this.

[Lunar]

not necessarily what I believe, but I don't like to leave bold claims un-critiqued

http://www.forbes.com/2010/01/07/china-economy-robert-fogel-opinions-columnists-gordon-g-chang.html

Is Fogel’s sunny view correct? First, he neglects to mention that China’s educational system, despite all the money it receives, remains inappropriate for a modern society. Hu Jintao, China’s leader since 2002, has been reinvigorating Marxist education and reinforcing orthodoxy. That’s great, but only if you want to know what Engels or Mao thought about the value of labor or why the Communist Party must maintain a monopoly on power. Fogel should also have mentioned something about the ingrained corruption, pervasive plagiarism and creativity-stifling curricula that are the hallmarks of Chinese schooling. There’s no question the county’s educational system has made some progress in the last 10 years, but the surprisingly meager advance is hardly a reason to think the Chinese will dominate the global economy in a generation.

Second, Fogel is right to note that migration of labor to cities has been the engine of Chinese growth, but that process has stalled in the global economic downturn. Yes, China still has cheap labor, but not mentioned in the article are the generally accepted projections that the labor force will level off in a half decade and then shrink. Moreover, he neglects to note that wage rates will increase as China becomes more prosperous. Already, industry is moving to other counties, such as neighboring Vietnam, to take advantage of even cheaper labor. So urbanization in the next 30 years cannot continue at nearly the same pace as it has in the last 30.

Third, it’s true that Beijing’s National Bureau of Statistics does not fully account for the output of the fast-growing service sector. That’s why its estimate of 13.0% growth for 2007 is low by about two percentage points. Then, small businesses were the most vibrant part of the economy. Today, the failure to properly assess the output of small business is resulting in an overestimation of GDP because these enterprises, which tend to be more dependent on exports, are suffering more than the larger ones. Fogel, a recognized genius, should have figured this out.

Fourth, Fogel’s views of the political system are questionable. He neglects to say that Hu Jintao has presided over a seven-year crackdown and that the Communist Party tolerates less criticism today than it did two decades ago. Economic reform has stalled because China has progressed about as far as it can within its existing political framework.

Further economic reform would threaten the power of the Communist Party, so the Party will not sponsor much more change.

A true market economy, for example, requires the rule of law, which in turn requires “institutional curbs” on government. Because these two limitations on power are incompatible with the Party’s ambitions to continue to dominate society, China cannot make much progress toward them, at least as long as the Communist Party is around. I don’t care how many conferences Fogel gets invited to. China’s economy has just about reached the limit of what is possible.

Fifth, Fogel apparently knows almost nothing about Chinese consumer spending. Historically, consumption contributed about 60% of China’s economic output. Today, it accounts for about 30%--and that number is going lower. Why? Beijing’s stimulus spending, about $1.1 trillion last year, is devoted almost entirely to building infrastructure and industrial capacity. As a result, the role of consumer spending is decreasing. Moreover, Beijing’s export-promotion policies, like holding down the value of the renminbi, are also anti-consumer. Although Chinese leaders talk about increasing consumption, on balance they are doing their best to undermine it.

[Lunar]

http://www.foreignpolicy.com/articles/2010/01/07/a_123_trillion_china_not_likely

In his bombshell of a projection that China will produce $123 trillion in economic output by 2040, Robert Fogel conveniently dismisses any number of problems that threaten China's economic development, from environmental degradation to stalled political and economic reforms, by arguing that "Beijing has proven quite adept in tackling problems it has set out to address."

Past success is no guarantee of future results, and Fogel sets his entire analysis -- which implies an average annual growth rate of about 10.8 percent a year for more than 30 years -- on that shaky assumption, entirely overestimating the Chinese government's omniscience and its ability to overcome the country's enormous political, economic, and environmental challenges.

These problems on almost every level will prove far more threatening than Fogel suggests. First, the financial crisis has stalled the process of economic liberalization in China and strengthened the state's role in market outcomes. Over time, this will certainly create a range of inefficiencies that hinder future growth. Beijing's stimulus response -- originally deployed last year to compensate for the fallout in global demand for Chinese exports -- will probably have permanent repercussions. Already, industry revitalization and consolidation programs, coupled with a massive influx of easy credit, are stifling the private sector (aside from real estate, which could present its own downside growth risk) and encouraging production overcapacities in state-controlled, export-intensive, heavy industries like steel and cement. The Chinese renminbi's steadfast dollar peg since mid-2008 is giving even more incentive for export firms to over produce, which will inevitably perpetuate a reliance for growth on exports to consumers in America, Europe, and Japan -- with all the risks that come with that dependency.

The leadership now looks less willing than it has in decades to abandon its economic control. Beijing won't soon forget that China's restricted system allowed the government to quickly mobilize fiscal and credit resources to rescue growth and prevent social instability in the face of serious economic crisis. Meanwhile, the more liberalized U.S. economy, once a model for China, remains burdened with surging debt and double-digit unemployment. The free market has lost a bit of its luster.

This heavier reliance on a state-led approach will doubly skew China's growth potential by dampening innovation and reducing the returns expected on sizable education investments. It will be enormously difficult for China to move beyond manufacturing to become an innovator without genuine reform of a political and economic system that stifles individual expression and creativity and directs massive human and financial resources toward less-innovative, state-owned firms. Fogel's expectations for education's growth contribution, based on education and productivity data in the United States, may not fully transmit to China. After all, China's top college graduates are actively seeking jobs in either government or state-owned firms, for higher salaries and job security. That's good for the bureaucracy, but not so good for innovation and entrepreneurialism.

Fogel warns that Europe faces some serious demographic challenges. True enough, but as Fogel only briefly acknowledges, China has an aging population of its own to reckon with. Chinese statistics show that the country's birthrate fell 42 percent from 1990 to 2007, and government projections suggest that by 2025, nearly a quarter of China's population will have celebrated its 60th birthday. Not surprisingly, Beijing is already considering ways to strengthen the country's inadequate social safety net, but this process carries its own policy risks and the country's fragmented pension system won't be fixed so easily. Local governments that operate their own social security funds will resist a push to centralize the effort, and the amount of capital needed from the central government to make benefits meaningful will meet fierce resistance from deficit hawks within China's Finance Ministry. If the leadership falls short in caring for the elderly (efforts to date have certainly been inadequate) this population will present a much larger than expected drag on economic growth.

But the most important reason why we won't see 1.4 billion Chinese earning an average of $85,000 per year is simply that the Earth can't sustain such rapid growth. Today, just 4 percent of China's people own their own automobile. Now multiply that number by 20 and imagine the environmental stresses China would have to manage as a result of such an increase -- not to mention the impact of price spikes for the traditional resources that will remain principal components in the energy mix for at least the next 20 years. Fogel's forecast seriously underestimates these problems.

The biggest environmental challenge for China's leadership will be in securing enough water to keep the economy afloat. Fogel predicts that the agricultural sector, China's heaviest water consumer by far, will remain an "underappreciated economic engine" for growth. But Beijing already faces water scarcity, and industrial growth plus urbanization will mean increasing demand on China's already-inadequate water resources. The Water Resources Group, coordinated by McKinsey & Company, recently forecast that without significant policy changes, China will face a 25 percent supply gap for expected water demand by 2030. This is an expectation of what will happen, not an outside possibility.

Beijing's capacity to cope with the complex issues tied to continued growth is anything but assured. It will face insurmountable difficulties, for example, in forcing local-level bureaucracies and companies to adhere to central-level environmental and economic policies. History suggests a far more pessimistic outlook: Despite the 20 years that have passed since Beijing mandated that local governments incorporate water environmental protection into their production and construction plans, and the numerous iterations of that policy since, China's Ministry of Environmental Protection's own data clearly shows a more than 34 percent increase in wastewater emission from 2000 to 2007 alone (a primary driver of water pollution). Nearly two-thirds of the population now believes that water pollution is China's most pressing environmental threat.

Is the world ready for the China that Fogel describes? A better question: Is China?

[Verily]

I'm bullish on China, but he's way overstating the Chinese case and way understating the European case at the same time. First off, European birthrates have been rising for the past few years and look likely to return to over replacement level in all but a few countries (Italy, Portugal and Spain being the big losers). Furthermore, he's ignoring the impact of immigration, which will become a greater and greater factor in European demography over the next half-century.

Also, he has failed to account for population stagnation in China due to the abundance of males as well as the inevitable falling birthrates there with urbanization and greater individual purchasing power. His arguments with regards to Chinese agriculture are bizarre and unfounded. Chinese agriculture remains mired in pre-modern technology and is unlikely to change in the medium term. It will require a shortage of farm workers for serious agricultural reform to take place, and, despite the steady stream of Chinese into the cities, farm labor is still abundant in China.

Also, while education is important, Fogel puts way too much stock in useless correlations; he's too obsessed with cliometrics to see the big picture. Yes, the rising level of education in China will help their economy, but not at all to the degree Fogel alleges. Yes, college-educated Americans produce much more than those without high school diplomas, but this is as much a product of who acquires college educations (socio-economically as well as in terms of intelligence and motivation) as it says anything about the inherent value of a college education in improving productivity. Finally, Chinese institutes of higher education remain sub-standard and insufficient to educate the growing number of Chinese interested in them--the United States's sole major international advantage these days is absolute dominance in higher education, and Chinese who leave China for their education often do not go back because, while the economy is booming, wages remain much lower.

There's a lot more wrong with the article as well. China will be the largest economy in the world in 2040, probably by a wide margin. It will have an HDI around the high/very high border and a GDP per capita in the range of the weaker end of developed Europe (comparable to Spain or Greece, maybe). But it will not be some ridiculous juggernaut leaving everyone completely in the dust.

[Bo]

Is this in nominal or real GDP? Because if it's real GDP, I have a very hard time believing it. Maybe that kind of GDP for China is going to be possible in 2060 and beyond, but NOT in 2040. Even 2060 is probably the earliest date for China to have this kind of GDP. This would translate to about $85,000 per capita. China right now has about $3,000 per capita. Almost all developed nations don't even have a per capita GDP of $85,000 yet.

[opebo]

By 2040 the world GDP won't be 123 Trillion.  What nonsense.  We're practically up against the ceiling now.

[Bo]

We're practically up against the ceiling now.

What do you mean specifically? Do you mean that peak resources will prevent the world economy from developing much further? Because I think renewable energy will fill in the energy gap caused by resource depletion.

[opebo]

We're practically up against the ceiling now.

What do you mean specifically? Do you mean that peak resources will prevent the world economy from developing much further? Because I think renewable energy will fill in the energy gap caused by resource depletion.

Yes I think it is quite likely that there will be severe problems when certain resources become insufficient.  Mainly oil.

[Sam Spade]

Articles like this prove what crap PHds are now.

In addition to the reasons Lunar posted, and in addition to the fact that I'm certain China makes up their numbers to a certain extent, there are at least three other things that come to mind why this is near impossible.

Long-term, I'm pretty bullish on China, but in the near-term, I agree with Jim Chanos.  Which means China will probably have to go through something like or worse than the US Great Depression in order to reach of the pile.

[Bo]

Which means China will probably have to go through something like or worse than the US Great Depression in order to reach of the pile.

Would you consider what Japan went through since 1989 a Great Depression? China might experience something like that in the future, but I don't think it will experience a Great Depression of U.S.-1930s magnitude.

[○∙◄☻¥tπ[╪AV┼cVê└]

If this is in 2040 dollars, big deal. If this is in 2010 dollars, I have a bridge to China for sale, real cheap.

[opebo]

Long-term, I'm pretty bullish on China, but in the near-term, I agree with Jim Chanos.  Which means China will probably have to go through something like or worse than the US Great Depression in order to reach of the pile.

In order to get them to implement some sensible demand-supporting redistributionist welfare state Keynesianism as the West mostly did after the Great Depression?  Because that is what made GDP so high there.  Alas, the policy which was the result of the GD is abandoned now, and as far as I can tell you support this.  So, what is it you imagine is the salubrious effect of a Great Depression as a right of passage, if not Keynesianism?