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One reason China hit the slowdown at an earlier stage surely is due to its sheer size. Japan was 100 million or so. SK, Taiwan, fractions of that. All relied on exports driven to grow fast.

But you need a large external market for that, and the larger the ROW is relative to you the longer you can extend that period. That's probably why Singapore can do it indefinitely, and China hits a wall at circa 35% of US GDP. Because ROW relative to China is much smaller, compared to Taiwan, Japan, SK.

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Nov 22, 2021Liked by Noah Smith

Japan's growth plummeted after its crash, but Korea kept growing fast even after 1998.

Should we expect China in 20 years to have income up just 50% like post-89 Japan, or up 250% like post-98 Korea?

One billion people with average income of $21,000 is very different from one billion people with average income of $42,000.

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Nov 22, 2021Liked by Noah Smith

Great read, Noah — keep it up!

Also curious what this means for US foreign policy.

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Before the invention of representative democracy, there was an ongoing tension in government forms, between avoiding instability by having certainty in who the King was and making it hard to overthrow them, and avoiding the Bad King problem by making it easier to get rid.

Mostly countries moved towards government structures that were less reliant on the King to do everything, which at least meant that the passive/bad quadrant wasn't much of a problem (and the passive/good quadrant generally became the better kings than the active/good quadrant)

The solution is to build a mechanism for replacing the King that relies on a consensus that the King is bad and requires a consensus that a specific someone else is better. The best such mechanism humanity has found is democracy - note that formal opposition is much harder to co-opt into changing the rules than the oligarchy was for Xi. Even though China thought it had such a mechanism, the absence of a formal opposition meant that Xi has been able to undermine those mechanisms much more easily than Trump or even Orban.

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Personally, I loathe our adversarial two-party "democracies". which eternally pits those who have money against those who don't. Hence Dems want to tax the rich in order to implement desirable social policies, eg, public infrastructure upgrades, free tertiary education, universal healthcare, etc; Repubs would rather limit government spending, because they are wealthy enough to look after themselves.

As far as China's development is concerned, it can longer rely on "stealing Western technology", because of the US desire to maintain global hegemony - and consequent US-enforced decoupling - means China will have to develop its own technology from now on.

I'm trying to introduce MMT to China; their consensus one party meritocracy would absolutely flourish with MMT, enabling them to overcome the present crippling contradictions in a market economy (eg if climate change is real, the market will simply not be able to deal with it. carbon taxes or not, because the trillions of dollars of stranded fossil assets will destroy global financial stability (make the GFC look like a picnic). China could transition to renewables ASAP; financing is NOT the problem for a currency-issuer , resource mobilization is the problem to be solved.

But China is advancing its super computer technology, the success or otherwise of which will determine the winner of the "competition" between the US and China. The ]democratic' West need not be paranoid at the prospect of China winning this competition, because the achievement of common prosperity is something the whole world desires; and China would welcome UNSC reform which eliminates a resource wasting and potentially disastrous nuclear arms race.

I hope the CCP can become less paranoid, and let people say what they think, while the CCP demonstrates the superiority of their "socialism with Chinese characteristics" system, to achieve

sustainable, rising living standards with "common prosperity"., something which is impossible for a competitive 'invisible hand' market economy to achieve by itself, without public sector intervention. The current Evergrande real estate disaster in China was entirely avoidable, with proper management of the private sector market. which the CCP patently failed to implement.

The CCP is still seduced by Western market ideology as their saviour, after 3 decades of "opening up" produced spectacular results by adopting free market processes....but now they need to be looking at the limitations of free markets.

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The Chinese Real Estate is not an issue

The world does NOT understand the CCP ECONOMIC PRINCIPLES

People misread and misjudge the CCP ECONOMIC PRINCIPLES in their prognosis of doom for the Chinese economy – w.r.t the massive upliftment of 100s of millions out of abject poverty, drudgery and misery.

Take the example of the Chinese “Ghost Towns” and its impact on Bank NPAs

Let us assume that 30 million tons of steel,was used in the so called ghost towns,15 years ago.After 30 years, when these buildings are replaced,this will be steel scrap,and its price will be double the price.of prime steel today.The cement is a dead loss.

But let us dig deeper.Bao Steel may bill steel to a builder,at say,200 usd/ton,but the Marginal cost of that steel,might be 100 usd/ton.This is not enough.The Marginal COST To the steel cluster,in a communist nation would be 15-20 usd per ton,as the coal mines and steel factory,ports,rails,roads etc.,are already in place.The difference between the coal tarriff and the marginal cost of coal is a TRANSFER PAYMENT FROM Bao steel to the coal mine and ports etc (if Bao is buying Coal)

If Coal is selling at 50 usd/ton,the Marginal Cost would be 4-5 USD (being cost of power,diesel and cost of variable labour).

So the MARGINAL COST of the Ghost towns,would be 10-15% of the contracted value of the towns.

At that time,it was the RIGHT decision to set up these “ghost towns”,as the price of steel,coal,cement,paints,labour etc., was much lower,and so was their marginal cost.It made sense to lower the ENTIRE PRODUCTION cost of these plants, by MAXIMISING production, and then using the production,in so called GHOST TOWNS.The benefit of lowering the ENTIRE PRODUCTION cost of the steel,coal,cement plants,would be in the billions of USD.IF THE SAME INFRASTRUCTURE WERE TO BE SET UP AT TODAY’s PRICES OF steel,coal,cement,the cost WOULD BE MUCH HIGHER (far beyond the accrued Chinese Inter bank interest rates over the years)

As far as the banks who lent to the builders of these so called ghost towns – it is important to understand that the Banks have NOT funded the towns.The Banks have funded the input suppliers of these towns,id.est., the steel,cement,paints, furniture and appliances etc factories. In particular,the banks have implicitly funded,the profits of these input suppliers.

Then we calculate the employment provided to a mass of labour in these ghost town projects,and its attendant benefits and the management and technical expertise,developed by the builders,in these ghost town projects.

It must also be noted that the INCREMENTAL PROFITS earned by the steel,cement,paints,furniture and appliances etc. factories,as suppliers to the builders of the ghost towns – would have in the last 15 years,based on a ROCE of 20-30 % ,yielded an aggregate return of 1000-1500% to date (with the attendant revenue streams to the PRC,in the form of direct and indirect taxes,besides other incidental gains)

Hence,for a Communist nation,the Marginal Cost for the Cluster of the “Ghost Towns” (which includes the downstream supply chain benefits and the benefits to the state) is very low and MIGHT even be NEGATIVE,based on the Marginal Cost of the CLUSTER.

If the PRC calculates the incremental gains to the steel,cement,paints,furniture and appliances etc. factories,and their staff,over the past 15 years and the revenue earned by the state from this chain,over the last 15 years,the gains per se, could more than bail out the bank loans,to the so called ghost towns

IT MUST BE NOTED THAT THE LABOUR USED IN THE GHOST TOWNS,AND THE LABOUR USED (IN PART),IN THE INPUT SUPPLIERS, TO THESE GHOST TOWNS – would have had NO OTHER employment,were it NOT for the Ghost town projects. These millions of labour were introduced into the labour pool,ONLY due to these Ghost Towns.Of course,they would have inevitably entered into the labour pool – but only after 5-10 years (on such a large scale).

Hence,there is no loss to the PRC,on account of these so called “ghost towns”.dindooohindoo

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Great piece. But I always wonder why everyone says that China pulling itself out of poverty was the most impressive case of poverty reduction, when Japan, Taiwan, and Korea were both earlier and did it faster. Is it just because China is 10x the population of Japan? I don't really see how China being 1.2B rather than 120M people makes the feat meaningfully more impressive.

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It's funny, just a week ago I decided that I was thought it was very unlikely that China reaches the same per capita GDP as the UK at PPP and keeps it's current politcal system after reading 3 books in China in 3 weeks or so. The great wall of debt just describes textbook repression of creative descruction for the purpose of social stability and rent seeking, Acemoglu and Robinson style. Potentially more tellingly, China's AI dream in describing what it portays as a dynamic tech environment to me at least seems like a classic case of the ability to make money being determind by control of state power rather than innovative ability. Unfortuately I didn't make this prediction public, but I did text my friend doing a China studies degree my prediction (although I didn't put a precise probability on it.)

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Noah giving me Brad DeLong vibes (https://www.bradford-delong.com/2015/12/ever-since-i-became-an-adult-in-1980-i-have-been-a-stopped-clock-with-respect-to-the-chinese-economy-i-have-said-alw.html):

> Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash--in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises.

> I was wrong for least twenty-five years straight--the jury is still out on the period since 2005. And that makes me very hesitant, now that a crash--even if, perhaps, not the crash I was predicting--is at hand, to count China and its supergrowth miracle out.

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Sort of tangential, but I wonder if there are maybe world systems-adjacent theories for explaining the middle income trap. Do they top out, or is further growth suppressed because it can only occur relative to a ratio with the hegemon (e.g. US) -- that is, maybe the political factors exogenous to 'pure' economics could be explanatory?

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You’re the first person I’ve seen who also recognizes that China’s heretofore successful containment of COVID is actually a risk rather than an advantage

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I would expect that the breathless flurry of directives would have had a negative impact on economic growth. Largely shutting down significant fields like pop entertainment and private education services normally has a bad effect on the economy, at least temporarily. But I haven't seen anything on it. Maybe the statistics are deteriorating or maybe the effect is lost amidst the COVID issues and the oceanic transport delays.

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deletedNov 22, 2021Liked by Noah Smith
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