ECONOMIC ANALYSIS: Those fearing China's economic prowess miss the point

January 7, 2008

Fear of China is a staple of protectionist rhetoric. Concern about China's emergent power comes from the formerly thoughtful broadcasters from CNN, the presidential primary trail, the Pentagon and, of course, the blogosphere. What really is China's economic role, and what do we have to fear? China's billion souls, strategic location, emergent market economy and long history of tyranny make it an interesting, and now quite dynamic, area of study.

China's economy looks to be a powerful engine of growth, but looks might be deceiving.

Growth for the country really comes in two forms. The first is by moving workers from subsistence agriculture (or something similar) to factories and other modern economic activities. Given the large share of rural Chinese, even modest shifts of workers to urban areas will result in extreme economic growth (perhaps double digits). The second type of growth is through simple productivity enhancements (increasing the value of goods produced by existing workers).

The increase in workers is not a sustainable type of economic growth in that it will level off to natural population growth once the transformation from rural to urban China is complete. Further, simply adding more workers to urban types of occupations will not significantly raise their standard of living (which currently is about 1/30th that of the United States).

For China to increase the standard of living of its residents, it must have an economy that enjoys robust productivity growth.

China's problem is the bulk of its current growth-roughly 6 percent a year-comes simply from adding more workers to factories, not making individual workers more skilled. This won't raise the income of existing workers (indeed, the flood of new workers from the countryside could reduce wages, and dampen the incentives for labor-saving productivity growth).

There's much speculation on how long it will take China to catch up to the United States. The quick answer: a very long time. If China can sustain a 4-percent growth rate in productivity, it won't catch up with the U.S. standard of living in this century, or even early in the next century.

Growth in China would be enormously helpful to the United States. By growing, China would make the world's pie larger (and we all could have bigger slices). This simple lesson of economics has been lost upon the protectionist critics of China. More important, an affluent China is more likely to be a peaceful world partner than if it remained a struggling economy.

So, the real threat from China is not that it will catch up to the United States and dominate it, but rather that we will respond to its infant economy with protectionist policies that make us all worse off, and strangle the nascent market economy.

Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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