Thread by @Noahpinion

Today's @bopinion post is an important one. It's about how China's growth model changed in response to the Great Recession.

But more broadly, it's about whether China's authoritarianism will hurt its long-term growth.
bloomberg.com/opinion/articl…

We start with the observation that China's economy is slowing down (h/t to @BaldingsWorld):
bloomberg.com/opinion/articl…

BUT, this may be only the most recent effect of a longer-term trend: slowing Chinese productivity growth.

In 2008, Chinese productivity growth collapsed and stayed low. Here's the most optimistic estimate I could find:

China's economy appears to be in a phase of "extensive growth" - building a ton of apartment buildings and office buildings and roads and trains, but not upgrading its productivity nearly as fast as it used to.

Why did productivity growth suddenly halt when the Great Recession hit?

Some researchers suggest that it was due to changes that China's government made in order to avoid being caught up in the recession.

They opened the floodgates of lending.

Suppose you want to make ABSOLUTELY, 100% SURE that your economy avoids even a small recession, because you think a recession could topple your authoritarian government.

You send tons of money to people you KNOW will be able to use it immediately.

But those shovel-ready projects may just be shoveling...er...well, they may just be wasting a lot of the money.

Some researchers believe that China's stimulus change its whole growth model, by encouraging the creation of inefficient lending relationships, financial institutions, business models, and incentives that far outlasted the recession.

China's growth is still driven by *investment* rather than consumption.

BUT, that investment may now be going to meet domestic demand for construction, rather than into export industries that raise national productivity.

Paul Krugman has a great post on this today: nytimes.com/2019/01/15/opi…

He has a great graph showing that the Great Recession is when China's big trade surpluses collapsed, but when investment kept right on going.

Joe Studwell has a theory that middle-income countries get rich by forcing their businesses to export, which raises productivity via competition in world markets and absorption of foreign technology.

China seems to be doing less of this since 2008.
amazon.com/How-Asia-Works…

In its desperation to avoid even a tiny downturn in 2008-10, China may have sent itself straight into the dreaded Middle Income Trap: bloomberg.com/opinion/articl…

Now, China's leaders are obviously worried about the Middle Income Trap, and they have a plan to get out of it, called Made in China 2025:
bloomberg.com/news/articles/…

But China's international aggression - spying, IP theft, exclusion of foreign companies from the domestic market, military expansion into the South China Sea, territorial disputes, etc. - may make that strategy very hard to implement at this point.

In other words, we may finally be seeing the long-predicted effects of authoritarianism on growth.

Lack of elections, state capitalism, and disregard for international rules may be forcing China into an inefficient growth model based on unproductive construction projects.

Now remember, even if China falls into the Middle Income Trap, its economy will still be (and really, already is) the world's largest, because of its sheer enormous size.

bloomberg.com/opinion/articl…

BUT, in terms of enriching its people, China may fail to attain the heights reached by its neighbors like South Korea and Taiwan.

And instead of dominating the world, it may simply be a little bigger than its far richer rivals.

“China is a sleeping giant. Let her sleep, for when she wakes she will move the world," said Napoleon.

Well, China did wake, and it did move the world. But if it can't get out of this productivity rut, it may not end up moving it as much as many predicted.

(end)