It’s entirely true that China’s economic growth rate has fallen to the lowest levels in 28 years, back to the dreadful stagnation of 1990, when China was only growing at 4 percent or so. That’s more than the U.S. is growing even in the middle of the Trump boom. We’d all kill for a gross domestic product growth rate as high as what China calls low. This is not, though, a commentary on how bad our own economic policy is, nor really one on how good China’s is today. Rather, it’s one on how terrible, appalling, and truly awful China’s economy used to be.
We can see this in a couple of graphic forms, either China’s GDP as we normally measure such things, or after we strip the effect of inflation out. We can even see it by measuring the number of people living in extreme poverty worldwide, China’s growth leading to there being nearly no one in extreme poverty.
To an economist, there are really two different types of growth. In an economy like the U.S. (or most of northern Europe and offshoots such as Japan, South Korea, etc.) it’s all about discovery: What are the new ways of adding value, raising productivity? These are difficult things to work out. We talk of being at the technological frontier, advance meaning expanding our knowledge of how to do things better.
Everywhere else, growth is a different matter. We’re inside that technological frontier; we’re just not applying what is already known about how to make a place or a people rich. The task is thus to apply what is already known to local characteristics — a much easier task.
Among properly switched-on economists, the puzzle isn’t how do we make poor places grow, it’s why aren’t they growing? We already know how to create the next mass of wealth — use these machines like this, have a legal system that allows that, the tax system should be of roughly this shape, and so on. After all, we have that example of the already-rich world to look at. For those places that have recently become rich (Japan since World War II, South Korea, China coming up fast), it’s called catch-up growth. Among those switched on, the reason places haven’t is political.
No, not that the global economic order doesn’t allow it, but that domestic politics doesn’t. Local governance prevents the economy working as it could.
As to why China didn’t do that growth thing, that was because of Maoism. The Great Leap Forward led to a 25 percent decline in GDP in just one year. The Cultural Revolution led to another couple of years of roughly 5 percent decreases following some recovery. In fact, in 1978, when finally the idea of a properly socialist economy was abandoned, China was about as rich as England was in 1600 A.D. Yes, after we account for inflation. Today, China is about where Britain was in the 1960s — 350 years of that technological frontier economic development packed into just four decades of catch-up growth. There’s no reason why other currently poor places can’t do the same.
The true description of how it was done was that they simply stopped preventing it from happening. They allowed the free market to flourish and the capitalist greed for profit to let rip. Sure, the Communist Party is still nominally in charge and there are all sorts of state-owned enterprises. But at the grassroots, China is probably the most competitive free market that has existed since Friedrich Hayek was a lad, if not before. Certainly it’s vicious enough to have Ayn Rand yipping with delight.
All of which is why it’s had 5-9 percent GDP growth rates per year for the past three decades. Lifting some billion people up out of abject penury as it goes.
There’s a lesson there for the younger part of the Democratic Party these days. Having socialism made people poor, or at least left them at historic levels of destitution. Letting that undirected and unplanned market take over made them rich. Something we might ponder as we discuss whether to bring socialism to a rich country, no?
Or as we might put it, planned economies of the socialist type have never made a population rich anywhere, whatever they might have done for the egos and comforts of the planners and the socialists. Are we sure we want to institute that system ourselves?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
