China’s economic ‘miracle’ in context
American Enterprise Institute
Key Points
- Contrasting China at various stages of reform to Japan and Korea at analogous stages shows China as less successful. The payoff is personal income, where China’s growth in local currency terms is similar to Japan’s. But it is slower than Korea’s, and, in comparable dollar terms, China is far behind Korea and Japan 40 years into the respective “miracles.”
- In evaluating key contributors to income gains—agricultural productivity, labor quantity and quality, leveraging, and innovation—China failed to extend education in the first 25 years of reform. A recent failure is the explosion in leveraging in the past decade. Other indicators of success roughly match Japan but trail Korea.
- China’s size makes it important even with less development success. For example, Chinese research and development spending affects the world while being inadequate to offset aging and indebtedness. When projecting economic size, though, trend extension is misleading. Korea and Japan illuminate how innovation and other factors will alter China’s trajectory.
Introduction
Size matters in international economics, and China has it. This will not change whether China becomes the global leader or falls victim to bad policy and stagnation. Prosperity also matters, and China is not prosperous by any reasonable standard. A vital question, therefore, is whether it will become so. There are fewer devout believers in the superiority of state-led development than 10 years ago, but they still exist. Others simply cannot imagine China’s growth stopping, so eventually it must become prosperous.1
One approach to answering the question, without relying on faith, is to evaluate China’s fundamentals. Another is to run numbers and see what seems plausible. (These can be found elsewhere.)2 A third, found here, is to seek historic parallels.
China’s size makes parallels tricky. The US is an obvious choice, but the US started life as a rich economy while China has at times been quite poor. The usual comparisons are to Japan and Korea. The main similarity, of course, lies in postwar expansion, often called economic miracles. Starting at different times, all three countries dramatically improved the lives of their people in a generation.
Japan’s reconstruction started in 1946, Korean reform in 1962, and Chinese reform in 1979. For simplicity, snapshot comparisons are made, bracketed by reform+2 years (so an impact may be seen) and the final observation at reform+38 years. Years +11, +20, and +29 split the sample evenly. For ease of reference, Table 1 shows the years for each country.
Even a China that stagnates as Japan has will be considerably bigger and more economically influential than Japan. Nonetheless, historical comparison to Japan and Korea across a range of indicators shows China’s miracle has faded prematurely, leaving the country far from rich and with little prospect to become so.
Notes
- Nicholas R. Lardy, “China’s Role in the Origins of and Response to the Global Recession,” Peterson Institute for International Economics, February 17, 2009, https://www.piie.com/commentary/testimonies/chinas-role-origins-and-response-global-recession; and Institutional Investor, “Special Report: China’s Growth Continues,” May 31, 2019, https://www.institutionalinvestor.com/ article/b1fn3td7t1d9z0/Special-Report-China-s-Growth-Continues.
- On fundamentals, see Derek Scissors, “Now or Never for the Chinese Economy,” American Enterprise Institute, December 4, 2017, http://www.aei.org/publication/now-or-never-for-the-chinese-economy/. On numbers, see Derek Scissors, “US-China: Who Is Bigger and When,” American Enterprise Institute, March 26, 2019, http://www.aei.org/publication/us-china-who-is-bigger-and-when/.
