PREDICTING CHINA GROWTH A TOUGH TASK
CHINA’S economic growth has been breathtaking. The Chinese economy grew by an average of 9.6 per cent annually between 1990 and 2010, according to the International Monetary Fund.
During the last global financial crisis, some feared that the Chinese growth engine would come to a grinding halt. However, despite exports faltering in 2008, the nation survived the bumpy ride without experiencing political instability or popular revolt.
Despite concerns about inflationary pressures and China's property bubble, most economists continue to predict sanguine growth for the country.
They seem to be of the opinion that China’s growth will be rapid and continue for many more years to come.
It is noteworthy to note though that these predictions are adjusted extrapolations of current trends, based on stringent methodical economic modelling.
But are these fail-proof and time-tested? Extrapolating from current trends makes sense when predicting growth in the next year and the following year. However, once the years become decades, such assumptions become more questionable.
To see things in perspective, if Christopher Columbus had invested one penny into a trust fund in 1492 at a real compound interest rate of six per cent annually above inflation, that penny would now be worth US$95,919,936,112.
Unfortunately though, reliable high-yielding 513-year investments are impossible to find. What is very certain though is that things do change and can go wrong. Therefore, past returns are in no way a guarantee of future performances.
Limitations of Modelling
When projecting future growth, economic modelling can offer only so much guidance.
These models predict future economic outputs on the basis of projected future levels of economic inputs.
However, future economic inputs are impossible to predict.
In the end, there is little to do but extrapolate from current inputs. But inputs, as well as other key features of any economy, change over time.
China’s economy is transforming rapidly: from agriculture to industrial to consumer services now. At some point down the road, China’s high growth rates will level out and slow, similar to other developing countries.
These econometrists are of the view that so long as the country's urban labour force continue to expand, its educational levels continue to rise, and foreign capital continue to come in, the Chinese economy would continue to grow.
But are things as simple as that? For one thing, economic models seem to have one fundamental flaw; they ignore the fact that as countries grow, growth actually becomes more difficult. In other words, the rate of growth decelerates before eventually reaching a steady-state phase.
When economies move up global value chains, graduating from the production of light manufactured goods to a reliance on the knowledge and innovation of their citizens to develop new industries, they climb less and less rapidly.
For example, it took South Korea 30 years (1960 to 1990) to raise its gross domestic product (GDP) per capita from one-thirtieth of the United States GDP per capita to one-third. It then took another 20 years for South Korea to jolt its way up from one-third to onehalf.
Stunted Growth?
China is already facing barriers that will limit its potential economic growth.
Another reason that economic models forecasting China’s continuing rise are too simplistic is that they tend to ignore the two one-time bonuses that helped the country to leap ahead.
The two one-time boosts are the population’s declining fertility rate and its increasing urbanisation.
Both factors have led to massive increases in economic productivity but they are finite processes and cannot be hoped to recur in the future.
Low fertility rates over the past few decades enabled women to enter the formal labour market. Hundreds of millions of women who would have stayed at home or on farms are now working, thereby boosting the country’s GDP figures.
Widespread urbanisation increases the GDP as urban populations are, in general, more productive than rural ones and because the former typically have paid employment whereas those in the countryside mainly engage in unpaid subsistence farming.
Black Swan Events
There are also several events that no one saw coming, such as the US-China trade war, the Covid-19 pandemic, the UkraineRussia war and the rise of India and Vietnam.
These events have definitely altered China’s growth trajectory.
But we will leave this for another day.