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The Sunday Paper – The Neoclassical Growth of China

China’s development path, so far, neatly fits the established track records of Korea, Japan and Taiwan.

This isn’t a new observation, but in the paper highlighted today from Jesús Fernández-Villaverde, Lee Ohanian and Wen Yao of the University of Pennsylvania, UCLA and Tsinghua Universities respectively, the researchers have boiled causality down to its most essential element i.e. Total Factor Productivity (TFP) growth.

In passing they note China’s declining return on investment, also a characteristic of Asia’s leading economies.

What’s new in the work is two observations:

  1. By 2043 China’s economy will have matured to the point where it’s output growth will fall behind that of the United States.
  2. This return to a laggard position will result in the economy of the United Stages being bigger, again, than China’s by 2100.

The authors address obvious caveats to this kind of long-range analysis but nonetheless arrive back at the conclusion the only way China can beat this fate is by continuing to boost TFP growth.

How could this be achieved? The answer is as obvious as it is thorny. As the paper delicately concludes “..our forecast may be too pessimistic if China implements new institutional reforms that improve economic efficiency to reverse its declining TFP catch-up rate.”

I’ve no doubt there are many in China working on those reforms but I’m skeptical that progress, beyond a certain point, can be planned and subsequently mandated.

China has just had a bout of free-ish market development and seems to have recoiled from the experience. To get to the next next-level, at some stage, it’ll have to find a way to come to terms with Michael Jackson impersonating CEOs, G6 flaunting property tycoons and for-profit enterprises putting owners’ interests ahead of all others; or fail.

However, the analysis in the paper suggests that that tricky fork in the development road remains quite some way off.

The paper also has some useful in-depth observation on the non-China Asian miracles and can be accessed via this link The Neoclassical Growth of China.

Happy Sunday

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