Monday, August 30, 2010

Past Performance is No guarantee of Future Earnings

I remain skeptical that China will come very close to matching America in per-capita GDP. I have doubts China will match us in raw GDP in my lifetime, since I doubt they can maintain the pace they've been on the last few decades.

Why? Because China's position on the development path matters, and they've been at the beginning:

Centrally planned economies tend to be good at wrenching societies out of agricultural poverty into the industrial age -- especially when the technologies needed to accomplish that shift have been invented elsewhere. Remember that in the 1930s, '40s and even '50s the Soviet model seemed viable, for precisely that reason.

As I've been droning on for years about, putting the most efficient peasant into the most inefficient factory will give you impressive GDP growth. The real challenge, which the old USSR failed to meet, is making those factory workers (and then information workers) more efficient once the simple input of migrating subsistence farmers to simple export-oriented factories dwindles to near zero.

If China can't maintain growth rates once that simple input ends, they won't match us. And it is quite possible that China needs an open and democratic society to do that. And if China does the latter, I won't really worry very much about a China that grows more powerful than we are.

Although I'll admit that an autocratic China has a better chance at making the transition from quantity to quality than the old USSR did. We shall see.