Time for a sanity check on China

The lead article on Foreign Policy’s website at the moment makes this eye-popping prediction:

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a superrich country in 2040.

So China’s going to take over the world, right?

Think about this for a moment. China’s 2008 GDP, according to the World Bank, was $4.33 trillion dollars (US dollars, current prices, not PPP etc etc etc.) To hit $123 trillion in 32 years, it’s gotta grow at 11% per year. Every year for the next 32 years.

I don’t care if the author’s a Nobel Prize winner, this is absolutely loopy. $123 trillion nominal GDP by 2040? Chinese living twice as well as the French? I’ll take that bet.

Now, to be fair, this seems like a nominal (not inflation-adjusted) GDP number, so China could just inflate like a bastard and prove me wrong. But let’s ask what it’d take for real (inflation-adjusted) GDP to hit that magic 11% number.

Leaving aside the question of whether China fudges its GDP figures, there are two big questions here:

Can China grow consistently at 11%?

11% would be stupendous GDP growth in any country. The average for developed countries is about 2-3%, and the average for developing countries is somewhere around 4-5%.

China’s GDP growth has been pretty impressive, but lately it’s averaged around 9%. Even if you believe the numbers coming from China, they’re still short. And as the economy gets bigger, it’s going to be harder for them to keep growing at the same rate - which is why larger countries have lower growth rates. All of the easy gains have already been made.

China’s probably not quite at that point yet, given its massive rural population, but the effects will become more noticeable as the population moves to the cities.

The other problem for China’s base growth rate is that they’re about to lose the “demographic dividend” - the boost to a nation’s productivity that comes as the working-age population increases as a share of the total population. Have a look at China’s population pyramid for 2010 - families are having fewer children, so the birthrate is lower, but there’s a large cohort of 40-to-50-year-olds who’re about to leave the workforce. Someone will have to support those people, and that’s going to come at a cost to the nation’s growth.

(The problem becomes even worse in the middle of the century, as plunging birthrates make the population even more weighted toward the elderly - which will only make it more difficult for China to keep up its growth rates.)

Can China grow consistently at all?

There’s a pretty decent probability of another crash in China in the very near future. A couple of years of zero GDP growth - or a couple of years short of 11%, even if growth’s still positive - and you’re going to have to grow GDP even faster over the remaining years to get back on trend.

Emerging market economies are more volatile than developed economies, almost by definition; it takes an awful lot of credulity to believe that you’re going to get three decades of consistent growth out of China.

But the rebuttal article by Nicholas Consonery makes one truly lousy point as well:

But the most important reason why we won’t see 1.4 billion Chinese earning an average of $85,000 per year is simply that the Earth can’t sustain such rapid growth. Today, just 4 percent of China’s people own their own automobile. Now multiply that number by 20 and imagine the environmental stresses China would have to manage as a result of such an increase – not to mention the impact of price spikes for the traditional resources that will remain principal components in the energy mix for at least the next 20 years. Fogel’s forecast seriously underestimates these problems.

You hear this sort of thing a lot from tree-hugging greenie types. Their argument boils down to “we’ve got cars and houses and Macbooks but you can’t have them ‘cause we got here first”, and it just doesn’t work that way. Everyone wants to improve their quality of life, and - given the choice - nobody in their right mind will accept a cut or a cap on their own quality of life for the good of “the environment”.

Answer honestly, readers: would you give up the computer you’re sitting at right now?

And if you’re not going to give up yours, why should the population of China be denied a computer (or a car, or whatever)?