Known Unknowns

How large will the Chinese economy be in two decades time? During an epoch of frayed nerves, when pessimistic sentiment dominates (at least among foreign commentators), it is valuable to be able to pencil in the upper bound, as forecast by a confident and influential insider. Australia’s Business Spectator introduces the positive contrarian case:

There are China bulls, and then there’s Justin Yifu Lin, the former chief economist of the World Bank. While China bears and their pessimism are the new black in the world of finance, Lin still maintains his bullish view that the country still has the potential to maintain fast-paced growth between 7-8 per cent for another two decades.

In Lin’s estimation, China’s potential for catch-up growth is still far from exhausted. Based on historical comparison with previous emerging economies, he foresees no sustained deceleration before 2030, with the 16-year growth surge up to that date roughly quintupling the country’s real wealth.

Lin points out that China’s per capita income level is only 21 per cent of the US back in 2008, which roughly reflects Japan’s position in 1951, Singapore in 1967, Taiwan in 1975 and South Korea in 1977. These countries [subsequently] … all grew between 7.6 and 9.2 per cent for two decades.

For a country of China’s size to follow the same trajectory would inevitably shake up the world in a way few have even begun to seriously imagine. Julian Snelder in The Interpreter spells out some of the implications:

Let’s stay well within Justin Lin’s timeframe and suppose China grows at 8% in real PPP GDP terms until 2030. That would mean today’s US$10,000 PPP GDP per capita will become US$46,000. China by 2030 would be above Germany’s present per capita levels, and 50% richer than Koreans today. The relentless mathematics of compounding means that China has 16 years to pile on US$36,000 of output per head, four times more than the leap achieved in the last 30 years of reforms.

If that happens, there will be unprecedented industrial carnage.

Germany and Korea are nations that China seeks to emulate. They have manufacturing companies which dominate globally, both in scale and expertise. The rise of both was industrially disruptive. Germany crushed the British chemical and electrical industries a century ago, and today its car makers pummel European rivals. Korea’s giants came to dominate memory chips and shipbuilding by bankrupting overseas competitors. If China continues to rise, Detroit’s fate might be repeated 20 or 30 times: Silicon Valley, Basel, Cambridge, Munich, and Nagoya would all be at risk. If China resembles 20 Germanys or 30 Koreas, it will dominate world business with 400 of the world’s top 500 companies.

Of course business isn’t zero-sum and others won’t stand still. Yet to fulfill Lin’s promise China must necessarily relegate most of today’s multinational corporations to niches or to extinction. This has happened already in telecoms equipment and wind turbines. China will need many more such cases. Today the equity value of Chinese companies is relatively puny, China has few global brands and quality companies are scarce. The success of Alibaba is deservedly celebrated, and the state basks in its reflected glory (the irony is that Beijing’s high-tech protectionism didn’t author Alibaba’s success, but holds it at risk).

[…]

If Justin Lin is right, China will ‘rule the world’ economically, if not by 2030 then certainly before mid-century. Its domestic economy will far surpass anything on the planet, its companies will tower above all, it will be the prime money-mover globally, it must lead technologically and the West’s middle and working classes will be industrially and financially sidelined. If he is wrong, but China’s leaders insist on his growth imperative anyway, then China will become highly indebted, parched, polluted and frustrated. That is why I am listening closely to Justin Lin.

ADDED: David Stockman has a different story.

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