Opinion and Economic Analysis

Hicks: China's economy colliding into great wall

July 27, 2013

For more than three decades, China’s economy has dazzled observers, with annual growth frequently sneaking into double digits. But the wide-eyed narrative of boundless wealth that has accompanied this growth is suffering a couple of hiccups.

The accounting of an economy allows for two distinct ways to measure growth. One is for a nation to add inputs—workers, capital, technology and raw materials. The other is to get better at mixing workers, capital, technology and raw materials.

Most places do a bit of both, but developing countries often focus on increasing inputs, while developed places simply get better at mixing.

Most of China’s growth over the past half century has been derived from adding people and machines to factories. As it turns out, a nation that can compel workers to leave subsistence farms for bad factories can see its growth accounting soar. To put it another way, China has forced perhaps 300 million people to leave the economic equivalent of 16th-century subsistence farms to work in 19th-century factories.

The growth accounting of this transformation appears as an astonishing achievement, but it still means the average Chinese worker endures a standard of living that is much like that of a Chicago tenement in 1890. But after three decades, the country is running low on subsistence farmers to move to towns.

For standards of living to rise, China must get better at mixing capital and labor in factories. The fact that it is not doing this well should come as no surprise. This requires capitalism; therefore, were the country to become even modestly successful at the rudiments of a market economy, it would be the first communist nation to do so.

This remains China’s fatal flaw, and like its intellectual ancestors who engineered Stalinist land reforms, its efforts have generated unwelcome side effects.

To provide machinery and infrastructure to all those new industrial workers, China has had to funnel most of its growth in national earnings into these new factories, roads and commercial real estate. To do this, it has had to keep borrowing rates low, which leads to bubbles.

Putting this all together, China has come near the end of its ability to move workers from farms at the same time it faces a bubble in factories and office buildings. The result will be a long period of low growth, but this comes against the backdrop of great social unrest. Enduring poverty, corruption, 30 million excess men and a soul-numbing lack of freedoms combine poorly with stagnant economic growth.

This will not be China’s century.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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