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If Mao still ran China, China would still be poor

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Vendors sell posters of Chinese President Xi Jinping and Communist Party founder Mao Zedong on a street of Gujiao in northern China's Shanxi province. (Photo: AAP)

In Brief

Reading the latest Chinese growth projections to 2050 brings to mind Karl Marx’s aphorism that history repeats itself first as tragedy, second as farce. One of the co-authors, a Yale economics professor, told the Financial Times the ‘main point of our findings is that, contrary to common misconceptions, productivity growth under Mao, particularly in the non-agricultural sector, was actually pretty good'.

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 But this is no argument to return to Mao-era policies, which would be a tragedy for the Chinese economy. Moreover, using Mao-era productivity trends to project Chinese GDP up to 70 years later, leads to farcical conclusions.

This is a shame, because the first 55 pages of the National Bureau of Economic Research (NBER) working paper provide a forensic account of Chinese multi-sector productivity growth from 1953 to 2012. Only in the admittedly ‘speculative’ section are these historical trends extrapolated out to the 2050s. Based on reform-era (post-1978) productivity trends, they project China’s average growth until 2024 at 7.8 per cent, 5.2 per cent during 2024–36 and then 3.6 per cent during 2036–50. A reversion to Mao-era (beginning after the Great Leap Forward) trends would see 5 per cent until 2024, 4.6 per cent during 2024–36 and then 3.9 per cent.

There are three big problems with these projections.

First, the Mao-era economy may grow relatively faster after 2036, but it would also be one-third smaller than the reform-era scenario. The authors assume that China’s total factor productivity growth rates automatically converge upon US trend after reaching 70 per cent of US productivity levels. Because the reform-era economy grows faster, it hits this slow-down threshold earlier while the Mao-era scenario is still picking the proverbial ‘low hanging fruit’. Mao-era productivity growth might then seem pretty good, but reform-era growth is still better.

Second, despite the authors’ care with historical statistics, they completely neglect the introduction of the one-child policy at the beginning of the reform era. They assume labour force growth of 0.5 per cent annually, based on the ‘lower end’ of China’s population growth until 2012. But the United Nations’ World Population Prospects projects China’s workforce to contract by 0.4 per cent annually until 2025, and by around 1 per cent annually thereafter. Correcting this would knock a few percentage points off either scenario.

The third, and fatal, flaw to the projections is the underlying model. The authors assume that regardless of the policy regime chosen, Chinese workers eventually become as productive as American workers. The choice of historical scenario becomes a simple choice of which parameter to use to extrapolate future growth. Under these assumptions, institutional choices simply don’t matter. This is exactly the kind of naïve ‘Asiaphoria’ that Lant Pritchett and Larry Summers warned of in 2014 in their own NBER paper.

More careful projections, such as those by the Australian Treasury, estimate productivity potential using a rough measure of existing institutional quality. In this model, labour productivity only reaches US levels if the economy is underpinned by US-quality institutions. A country with less developed economic institutions can still experience some rapid growth, but only until it reaches its lower level of potential as determined by its institutions.

It was because China was still so desperately poor in the 1970s that the authors were able to find ‘pretty good’ productivity growth in the Mao era. This is because Mao-era institutions provided superior economic conditions than what had prevailed during the preceding civil war and Japanese invasion. But while per capita income — closely tied to labour productivity — in China grew before 1978, it was still less than double the level of the Ming dynasty some six centuries earlier.

After 1978, the experimental introduction of private property, open markets and the political acceptance of entrepreneurs gradually expanded China’s productive potential. Since reform and opening up began almost 40 years ago, Chinese per capita income has doubled roughly every eight years. It now surpasses the Soviet Union at its peak. And using the Global Competitiveness Index as a proxy for institutional quality, China still has good institutions relative to its current productivity levels. This leaves some room for more catch-up growth.

But China needs improved governance and continued reform if it is to become a high-income nation. This is what it would take for China to avoid the ‘middle income trap’.

The Chinese edition of the Financial Times reported the growth projections under the headline: ‘In the long run, Mao-style policies could bring China higher growth’. This is a farcical policy implication. At best, a reversion to Mao-style policies might reduce income inequality, but only because Chinese would be more equally poor.

Paul Hubbard is a Sir Roland Wilson PhD Scholar at the Crawford School of Public Policy, The Australian National University, a visiting scholar at the National School of Development, Peking University. He is on leave from the Australian Treasury. These are his personal views and do not reflect those of the Treasury.

9 responses to “If Mao still ran China, China would still be poor”

  1. While most of Paul Hubbard’s arguments in this post may be correct (particularly regarding the Mao era model) and that includes the title particularly, the point on the middle income trap is a bit confusing, particularly in the context of using the US institutions as a reference point. This is because the high income levels are themselves vastly different from the entry point ($US 12,616 or more on 1/07/2014 by World Bank) to the highest level ($103,050 for Norway), or even the level of the US ($55,200). China’s income level was $7,380 then. Yes, it can be expected China will continue to improve governance and carry out further and possibly continual reforms over the years and decades ahead. But that is very different from catching up with institutions in the US. It is possible that China may enter into the ranks of high income countries in a decade. Its institutions, however, can be reasonably expected to be still very different from those of the US’s. Further, there is the debate whether China’s development and economic growth represents a new and different model, presumably different from that of the US. While so far it is difficult to prove the China model, it cannot be completely ruled out at this stage. It may takes much more time (likely to be several more decades) to prove or disapprove a China model.

    • Thanks Lintong Feng. Of course you’re right that the ‘high income’ definition is by its nature relatively arbitrary. On the question of institutions, I’m not suggesting that it’s necessary for institutions to ‘converge’ or resemble each other in a superficial sense. Institutions in a high-income China needn’t have the form of United States, or any high-income country for that matter. What matters is their substantial effect – do they foster capital accumulation, trade and innovation?

      • The USA for the last 35 years has let itself go from a creditor nation to a debtor one when they let their manufacturing industries to be taken overseas plus reducing their trade barriers.

        In addition, only the wealthy people and corporations have been allow to accumulation capital wealth and they have done it through tax breaks and making money in dealing with paper transactions on Wall Street instead of manufacturing goods at home. Furthermore, these wealthy people and corporations have done everything they can to stifle innovation in the USA because they don’t want future entrepreneurs creating competition against them.

  2. The USA was one of the richest countries in the world; however, when you look at the standard of living for the vast majority of Americans it was very poor for them prior to the Great Depression of 1929. Even now after 35 years of de-regulating the economy thanks to American CEOs and the Republican Party, the number of poor Americans is growing and there is still no end in sight. Capitalism has not worked too well when there is no effective government regulation.

    • Gunther, interesting that you mention the depression. If you look at Maddison’s historical income estimates, Chinese per capita GDP today is about where the US was in the 1930s.

      I’m no expert on poverty in America, so I don’t know what the trends of it are or the causes. But I expect that a child born into a poor family in the United States has much better prospects than a child born into a poor family in China.

      • There is less social and economic upward mobility for American kids compare to those in Europe. Here are some articles for your review.

        http://www.politifact.com/punditfact/statements/2013/dec/19/steven-rattner/it-easier-obtain-american-dream-europe/

        http://www.brookings.edu/research/articles/2011/11/09-economic-mobility-winship

        http://www.nytimes.com/2012/01/05/us/harder-for-americans-to-rise-from-lower-rungs.html?_r=0

        At least in the Great Depression, America still had its factories even though they were idled but nowadays, those factories have been dismantled. If America did not have a manufacturing base, it would not have won the Second World War II.

        If you look at Afro-Americans, even though there is a large Afro-American middle class, most Afro-Americans are still poor and don’t get the necessary services like good schools and jobs to make something of themselves. In addition, you still have a large group of poor white Americans in the Southern part of the USA where like their Afro-American counterparts, they are also deprive of good schools, good jobs, etc.

        I am no expert on China but when you look at the minimum wage in America, it has not been raise significantly for the last 45 years. In Australia, the minimum wage is $20 dollars, and the Australian economy has not collapse because of it and the price of hamburger at the fast food restaurants at McDonalds have not gone up to $25 to $35 dollars as economists have claim that would happen. You wonder how these business people and economists ever manage to obtain degrees in business and economics when they have been shown to be wrong time and time again. These people are somehow worse than Mao when it comes to making the world a poorer one when you look at all the depressions and recessions that have occurred because of their dumb/stupid economic/business ideas/theories that have been disproved time and time again.

  3. Gunther your are right about some things but you have many things wrong about America, you are looking at the world from a leftist perspective. The Wall St. crowd that almost destroyed the world economy in 2008 all walked away with millions of dollars and not one saw the inside of a jail cell. As for the idea that the US elite stifle innovation, have you ever heard of Silicon valley it is the envy of the world and responsible for most of the tech revolutions of the last 50 years. The reason the business elite closed factories in America and opened them in China was greed, and their wealth has greatly increased and it is both parties in the US that are to blame. As for poverty in America, 70 per cent or more of black children are born into single parent households. We have also brought in over 50 million of the poorest least educated people of latin America in the last 40 years. And if you think 2008 was bad you should see their plans for the future.

    • Dear Dennis:

      I am not looking at things from leftist viewpoint and what things I am wrong about America? I agree with some of your points like Wall Street; however, when you look at the Silicon Valley, you had a court case where the workforce had sue the CEOs because the CEOs had an unwritten agreement between themselves not to raid each other workforce in order to keep the wages down. Furthermore, most of the people in the Silicon Valley were brought in from other countries because the CEOs did not want to pay Americans software designers, engineers a decent wage and to this very day, Silicon Valley CEOs still do not want to hire American workers let alone invest in American schools in the areas of math and science.

      Yes it was greed that send the jobs overseas; however, it is still no excuse for American CEOs to import foreign workers to replace American workers in the USA.

      You can blame US economic and political policies in Central and South America for causing the greatest immigration of Latinos into this country in plus they brought those people in to break the unions as well.

      The Republican Party is mostly responsible for causing poverty in this country for the last 35 years with their stupid tickle tickle down theory. Furthermore, the greatest amount of poverty is in the Appalachian Mountain and the population in that area is white. With regards to Black American poverty, we could have wipe it out under President Johnson’s Great Society program. Under that program, poverty in the USA was cut in half; however, due to the Vietnam War, President Johnson’s decision not to run again for office and the rise of Reaganomics, that program was virtually dismantle. We would not be having race riots even today if we had kept that program. We have so many single parents families in the black community because we have virtually arrest just about every black men on criminal charges because we have denied them good education and good paying jobs which forces them to go into gangs in order to survive. How many Silicon Valley CEOs, managers and a large part of the workforce are Afro-Americans since the East Bay area has significant Afro-American population? There is less social and economic mobility for your ordinary American and that is a fact.

      I know what are Republican Party and the Corporate America’s plan for the USA because I watch the Thom Hartmann show, Ring of Fire with Mike Papantino, and listen to the Norman Goldman. They want to take us to America before the Great Depression of 1929.

    • So what if the Silicon Valley is a thriving place, it has not brought prosperity to people who are not engineers, software designers, etc. As a matter of fact, you have rich people moving into poor areas in Oakland and San Francisco, displacing the middle class and the poor class.

      The USA was a rich country during the Gilded Age; however, the overwhelming majority of people were still poor and did not have hardly any social/economic mobility until after World War II with the GI Bill and strong unions.

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