China’s Long-Term Economic Forecast: Good But Not Recession-Proof

Wisdom about China comes from EconLog’s Scott Summner:

Think of Mao’s economic policies as a regime capable of producing real GDP per capita equal to 1/20th the global economic frontier (which might have been the US or Switzerland.) Then Deng starts opening up China’s economy, and (combined with later reforms) this moves China to their current policy regime, which might be capable of producing a real GDP/person at 50% of the frontier.

There will be a multi-decade transition period where China sees a 10-fold increase in living standards, plus whatever increase occurred during that period in the leading economies. That will be a period of rapid catch-up growth. It does not mean that China has a good economic model in an absolute sense, it obviously does not. But merely by being less bad you’ll have a lot of catch-up growth.

The chart below shows China’s GDP per capita as a percentage of the highest country’s GDP per capital (excluding Luxemborg, which is a special case).

As I wrote about the Yuan devaluation, China’s current rulers don’t understand that they cannot manage the country’s business cycles. They shouldn’t try. Like the United States and Europe, China will have cycles. In the modern era, since 1980, they have not had a single year with declining real GDP. In the Asian financial crisis their growth dropped to just four percent–which we would consider very good.

Looking forward, China’s business cycles will probably result in a low that is just barely positive; they will probably have a year between zero and four percent growth. Overall, though, China has many more years of growth ahead of it, until it hits a limit based on the quality of economic policy. They are not yet close to the limits that of their current regime.