China Is About To Make A Mistake That May Rival Its One Child Policy

China avoided the world recession that started in 2009. The wise communist party, we are told, ramped up infrastructure spending – unimpeded by the need for licenses, court reviews, or rights of way. The government pumped in just enough infrastructure spending to maintain China’s healthy growth rate.

Skeptics of democracy and free enterprise waxed eloquent about China’s state capitalism, as directed by China’s communist party. We want more of what China is having over here – was the refrain.

Democracy and free markets indeed make mistakes. No one promised free sailing of steady growth, low unemployment, and the absence of business cycles. Bubbles and busts have been a part of the capitalist system since the Dutch Tulip Bubble of 1637. We can debate the role of government in the U. S. housing bubble and in Europe’s banking and Euro crises, but no proponent of market capitalism has promised a bubble-free, recession-free world.

The proponents of state capitalism and a one party system do make such promises. The Soviet Union promised that “scientific planning” would lead to steady growth, innovation, and the eventual overtaking of the United States. China’s communist leaders laud their “socialism with a Chinese face” in which sober and wise party and state officials can be counted upon to make the correct decisions.

History tells another story.  The most disastrous blunders have been committed by the scientific planners of one party states. Miscalculations and errors of the market system tend to be self-correcting if they are left alone. Even when they are mishandled, the damage is minor compared to the blunders of the state capitalists.

go to forbes.com

Chinese Woman with Dead Infant After Forced State Abortion

The picture sweeping China of a bereaved Chinese woman in a hospital bed with her dead infant after a forced state abortion at seven months. The woman and her husband were unable to raise the $6,500 fine the state charges for a second child.

http://www.ministryoftofu.com/2012/06/gruesome-photos-of-forced-late-term-abortion-appall-china-challenge-one-child-policy/

Dissecting Chinese Growth: How Long Will It Continue?

Academic specialists know a great deal, but they are not good at sharing their results with general readers. What we know about Chinese growth is a case in point.

There is practically no question more important than the future of Chinese growth. If it continues unabated for another decade, its GDP would be fifty percent larger than the U.S., and its per capita GDP would be a third. If growth continued two decades, its GDP would be two and a half times ours, and its per capita GDP would be half. China would be a dominant super power, its people affluent, and an economic powerhouse. As some have argued, affluence may bring with it democracy.

Other countries – Japan, the USSR, Germany – had long episodes of fast growth that came to an end. They were all high savers, but not to the extremes of China today. We all know that China’s growth spurt must eventually end, but it is vitally important to know when.

We can apply growth accounting to explain Chinese growth. (I’ll try to make it simple but the results are important).

Growth accounting divides growth into three sources:

1) The growth of capital and labor,
2) Technological progress, which allows us to produce more from the same inputs, and
3) Reallocation of inputs from less to more productive activities.

Since 1978, China’s output and capital grew at exceptional rates ((9% and 12%, respectively), labor at a more normal (but fast) 2%. According to the growth-accounting formula, some two thirds of Chinese growth is due to fast labor and capital growth. The remaining one third is technological progress.

Japan (1953-1985) is the closest parallel to China. Japan’s output and capital grew 7% and 9%, respectively, and labor at 1%. Less than half of Japan’s growth was from labor and capital; more than half was from technological progress.

Germany, in the early postwar years grew at 7%, capital at 6% and more than 60% of its growth was from technological progress.

China is underperforming Japan and Germany in percentage terms in marshalling new technologies for growth, but its performance is nonetheless impressive.

Japan’s and Germany’s huge productivity growth in the early postwar period was due to the vast technology backlog that had arisen during the war. China also benefits from a backlog, not due to war but to its earlier isolation. Like Japan and Germany, its growth will drop as the backlog is worked off. China was relatively more backward than Germany or Japan when each began their move; it may take longer for China to work off the backlog.

What do such figures tell us about the future, especially in light of the newly released census results?

First, China’s labor force growth has stopped for all practical purposes. This factor should reduce China’s growth by one percentage point, still leaving enough room for continued rapid growth.

Second, urban and rural populations have reached parity and labor migration appears to have peaked. With about one fifth of Chinese productivity growth due to labor reallocation, we can knock off another 2 percent, more or less, from Chinese growth.

Third, improvements in educational achievements have been striking, but they may not be enough to offset the effects of aging in an assembly-line economy such as China.

Fourth, with the destruction of the extended family by the one-child policy, the government will increasingly have to care of the elderly. When this happens, China will suffer the growth declines characteristic of transfer economies.

Fifth, with the “easy growth” of labor expansion and migration behind it, China’s growth will depend increasingly on technology. Technology advances depend on continued inflows of foreign direct investment. If the West decides to switch its FDI to other (lower wage) countries, China will lose it major source of growth.

China is more dependent on us than many think.