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How economic growth happens

Tuesday, February 28, 2017 6:49
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(Before It's News)

For years now the debate has been going on about the superiority of China’s economic model. China has averaged around 10% annual GDP growth for the past 30 years while, on a very good year, western capitalist countries might see something like 3% – and that’s on a very good year. Yesterday Global Times ran an interview with Ding Chun, a member of the Global Agenda Council on Europe of the WEF, and asked, “Do you think the West should learn from developing countries like China?”

He replied, “I believe so. The West used to praise highly the Washington Consensus. Then they promoted the so-called conscientious market economy. Now the economic situations of developing countries are better than those of Western countries.”

The Chinese government loves to tout the idea that, since Western countries are suffering and China’s economy is soaring, it means capitalism is bunk and Socialism with Chinese Characteristics (AKA authoritarian capitalism) is superior. China is lucky to have the Communist Party ruling it.

I’m not an economist, but I have taken one entry-level economics class – which is one more than anyone who would make a claim like that has taken. China’s meteoric rise would be completely predictable to any economist worth giving himself that title. Let’s dumb down growth for developing countries to its most basic form. Essentially, it’s turning this:

into this:

A poor developing country isn’t very productive, so after people save up enough money from picking wheat, they buy a machine to improve productivity and income. Eventually they can buy the most productive machine there is and learn how to use it most efficiently. Then with all the new money, industries that never existed before (ie-tourism) can also bloom. Voila! Growth.

China is massive and there are still a lot of people doing things the old-fashioned way. So it’s completely normal that, as long as the government doesn’t get in the way, there will be large growth for a long time. But China’s government did get in the way from 1949 to 1979. Then Deng Xiaoping had the wild notion that if you let people reap the direct benefits of their work rather than force them to slave for the good of the motherland, they’ll be more productive. So I suppose you can credit China’s government for the huge economic growth of the past 30 years. Just like if I won a marathon I could credit the guy who was bear-hugging me at the beginning of the race for finally letting go.

To be sure, China’s development under authoritarian capitalism has been much faster than, say India’s democratic capitalism during this stage (although not necessarily better). But what happens when everyone finally has the biggest, most productive machines? Then they have to innovate and make an even better machine or method if they want to keep growing. This is what western capitalist countries are doing now – and it’s much slower.

In fact, this is what they’ve been doing for more than a hundred years because they were the first to build these big machines. Late-comers like China only needed to buy (or pilfer) this technology and learn these methods that already exist – a big 2nd mover advantage. So naturally, its development has been much faster than the West’s was.

Now that developing countries like China, which are more numerous and have much larger populations, are getting these machines, their workers with lower wages and less stringent labor/pollution laws are making it cheaper to produce basic goods while developed countries struggle with ways to make them more efficiently.

During this struggle, developed countries are losing production they’ve traditionally had, yet their people have still clung to the quality of life they’ve grown accustomed to. Hence, many are going into debt. They’re trying to make up for this with even more innovation at the frontier, but again, it’s slow-going. So given China’s huge population, it will indeed continue to grow until its GDP is well past any western capitalist country. However, China’s growth is already slowing because of it’s diminishing returns in increasing productivity. So what happens when China eventually gets everyone the newest, most efficient machines?

Then even less developed countries will take away many manufacturing jobs and China will go head-to-head with developed capitalist countries in innovation. It will come down to who has a better education system and more intellectual freedom.  Given the current atmosphere, who would you put your money on as more sustainable in the long run?



Source: https://sinostand.com/2012/01/31/how-economic-growth-happens/

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