Economics still is not a science (could Mao improve today’s Chinese economy?)

Assuming a continuation of current policies, the paper predicts the Chinese economy will expand by 7-8 per cent for the next 10 years or so, with growth slowing to 5.2 per cent on average between 2024 and 2036 and then a rate of just 3.6 per cent between 2036 and 2050.

That is actually slower than the growth rate of 3.9 per cent it predicts between 2036 and 2050 if China were to return to Maoist policies introduced in the aftermath of the disastrous Great Leap Forward, in which between 30m and 40m died in a famine that was largely the result of economic mismanagement.

The authors of the paper were focused only on economic factors and did not consider the impact of individual policies or the enormous social costs of Mao’s “brutal” political movements and purges, which left many millions dead, ostracised or imprisoned in gulags.

Putting Mao aside, the 7-8% prediction already is clearly wrong and this is a July 2015 working paper.  By the way, the four economists who wrote the paper (NBER) are working at “…the Federal Reserve Bank of Dallas, Princeton, Yale and Sciences Po in Paris.”  And get this:

They concluded that the abolition of the private sector in China and the return to a command economy would yield an annual average GDP growth rate of 4 to 5 per cent between now and 2050.

The journalist who wrote the FT piece is the very good Jamal Anderlini, who understands the Chinese economy, and perhaps the limits of growth models, better than these researchers do.  That’s the actual fact here which we don’t take seriously enough.

Comments

I'm surprised they allowed this paper to be released - the destruction of human capital and productive capacity from the Great Leap Forward are something a graduate student would have been able to identify (without mentioning the terrible political outcomes and freedoms of the Chinese people).

However, I imagine there are a number of divergent opinions on China within the Federal Reserve academia ranks. Greenspan has discussed publicly his concerns regarding their debt and financial stability, likening them to Japan but without a stable democratic political system heading into a possible crisis. Richard Fisher has also expressed concerns on their long run projections for growth. The St Louis Fed's macro bulletin in August 2014 had a nice summary of the downward pressure China's real estate industry will have on the near and long term GDP growth rate (economists were Jun Nie and Guangye Cao).

Then of course you have Larry Summer's "Asiaphoria Meets Regression to the Mean" in October 2014 which was a nice summary on the growth miracles of the past century.

Still, it is surprising this one was let out of the gate.

Maybe the Chinese hacked the website.

It was released because freedom is a great thing!

The authors should read William Easterly's "The tyranny of experts" to understand how much harm autocratic development approach has caused to humanity.

Forgive them Hayek, they do not know what they’re doing.

It's a simple growth accounting exercise and purely mechanical. As such, it is also pretty vacuous - in essence regressing one trending time series an several others and then telling a causal story about them. In empirical microeconomics, one would be laughed out of the room for this, and rightfully so.

The one interesting aspect of the paper, assuming the measurement is done well, is that productivity growth under Mao was surprisingly high.

Rob, there is no "gate" a paper like this has to pass through. It's not an official Fed publication. And many Fed researchers have jobs in which they are allowed to devote x% of their time to whatever research they want to do, with no or minimal restrictions on how they disseminate it.

What will happen after 2050?

Nobody can tell you exactly what's going to happen tomorrow. But in 2050 people (if people haven't been incinerated by the Iranians) will be predicting what will happen in 2100 but no one will remember what the prediction of these guys was.

I thought that the confident prediction of growth rates 35 years out (to 0.1%!) was absurd on its face. The additional Mao scenario was just a little extra flavoring. Is there adult supervision at the NBER?

The authors merely quantified rates of economic growth from 1953 to 2012, and then extrapolated those rates into the future. While the authors found that the rate of economic growth during the Maoist period was positive, it was 4.2 % higher after the reforms were adopted. To project future economic growth, the authors used the historical rates, including the rate during the Maoist period. The objections remind me of the objections to quantified economic growth rates in the U.S., with some convinced that higher growth rates during periods when Democrats were President as compared to periods when Republicans were President must be a conspiracy by the economists in government because it just cannot be true. That economic growth rates during the Maoist period were positive likewise cannot be true and must be the result of either a conspiracy by those doing the quantifying or their incompetence. As for the projection for the period 2036 to 2050, I don't have access to the full paper so I don't know why the authors project a declining rate of economic growth if the reforms remain in place, but I assume it's for the same reasons that most economists project slower economic growth rates for China after 2036. That the authors assumed the same economic growth rate if Maoist policies were adopted as the historical growth rate during the Maoist period seems reasonable enough since by definition Maoist policies are little influenced by market forces (as opposed to force). What's of greater interest to me is what's going to happen in China after 2050 when China's population is projected to decline by roughly 400 million. If economic growth plummets (not an unreasonable assumption), will China be tempted to return to Maoist policies? Criticizing the authors of this report for not being sufficiently pure strikes me as both petty and misplaced.

I don't think it's a question of purity. Taking growth rates from a historical period and assuming they can be achieved again with policies from that period is just ludicrous. The Chinese economy and the world are very different than they were in 1953. You might as well argue the US could achieve over 5% GDP growth if we went back to the policies of the 1950's. That correlation belongs to a moment in time and can't be brought into the present, not to mention that some of those policies, like 90% top marginal tax rates, might not be ideal.

If China actually grew at the rates listed above, GDP per capita would exceed $40,000 in today's dollars by 2050.

China's aggregate GDP would exceed $50 trillion.

Highly unlikely that a country with that much private wealth would decide to reintroduce collectivization.

You mean you're not a scientist?

What are you then?

I dont want to talk to no scientist, telling me lies and getting me pissed.

China's population is going to decline by 400 million well before 2050.

If demographers have move up the period of population decline, that means that the day of reckoning may be sooner than what I indicated in my comment (and could be one of the factors the authors considered in their assumption of lower economic growth rates after 2036). I should add that the 400 million decline is the mid-range projection, with continued population growth at one end and an even higher decline at the other end.

Is one of the problems of demographics is we focus on the population decreases and not various points on the demographic scale. So the population of 400 million by 2050 sounds really far off but the decline of working age population is looking fairly close and the number of prime career and people starting families is already falling. Look at a highlevel births in Japan by Generation:

1945 - 1955: ~22 Million (Boomers)
1975- 1985: ~16 Million (X)
2005 - 2015: ~11 Million (Future)

In reality , the feritlity rate between Boomers and X parents has not really changed but less Generation X means less children overall. And looking at Chinese demograpics the prime early career and family formation (20- 30) is less than older generations. So the dangers of demographics is a lot harder to get out of than expected.

So Chinese social security will fall apart and IMF will not have the cash to bail them out before 2075? Oh my!

Fire up EconLit and you'll likely find papers published ca. 1982 offering similar projections re Japan.

What if they are all "ZMPs" from Cowenistan circa 2010?

Finally an economic strategy that Hillary can get behind.

Unlike all you guys here (except rayward), I don't find it ludicrous China could have gotten strong growth via Communist policies. The Stalin era had strong growth as well in Russia. However, I'd be wary of citing any working paper as strong evidence of anything. Notice the authors all have Slavic last names, suggesting a greater intellectual flexibility towards alternatives to capitalism than you Westerners. And, indeed, in the paper, the authors do compare and contrast the Mao era in China and the Stalin era in the USSR.

The Stalin era had strong growth as well in Russia.

And without real prices and in a context where negative value added is not unknown, this is reliably determined just how?

by winning the second war...

They were lucky to switch sides, to the victorious.

The USSR never "switched sides", and it wasn't very lucky to be invaded unexpectedly.

E. Harding is right. The Soviet Union had a consistent policy of war against Poland and Finland. Who it had to ally with in order to defeat those enemies of the proletariat is unimportant.

Funny and half-true! Poland, yes, but Finland was never turned Communist and the Finnish war was won before mid-1940.

No, you are right. Its completely possible Communist China achieved some decent growth rates.

1) The period in question is after a very long war that started before and kept going on after WW II for everyone else.

2) The communists probably had some leveling effect which helps growth by removing old blocks, e.g. freeing smart peasants from being a feudal peasant.

3) Education finally being able to be brought to a lot of people.

This is in fact why its stupid to claim they could re-achieve these rates: who are the masses of illiterate peasants who can be freed and taught to read and write? There is also no peace dividend.

Finally, what no one is taking into account is what China's growth rate would have been if the KMT had won the civil war.
(let's do two versions of that:)

Basically, before the Japanese invasion, growth in China was already starting to be export-oriented with foreign factories popping up in Shanghai. If you take this an extrapolate, the 1950's could have been the 1980's and 1990's Taiwan, ie very high growth under a KMT government that was semi-decent.

However, the KMT was helped in Taiwan because there were no old feudal arrangements, and the US encouraged and aided in land reform, etc. Its possible if they had won in the mainland they would have been merely corrupt and feudalistic. Still, its such a huge market, foreign companies would have arrived, and thus changes would have slowly been made.

I'm pretty confident even a lazy KMT in China could have at least matched CCP growth rates until finally beating them over time. (See Korea and North Korea.)

https://upload.wikimedia.org/wikipedia/commons/d/df/Two_koreas_gdp_1950_1977.jpg

That graph's inaccurate; North Korea grew fast during the 1950s and South Korea surpassed it during the mid-to-late 1960s, as North Korea slowed down in the early 1960s.

Which still proves my point.

Especially as the South started out with less industry.

look at India too...

Too many people naively presume that GDP growth is predictable and treat the forecasts as "truths". If we looked at GDP growth forecasts over the last fifty years even "a year in advance" we would find it is far smarter to presume growth 5/10/20/50 years out is not forecastable. Amazing to me how many economists don't realize this and want to make policy prescriptions. And what are you supposed to do if you cannot forecast and need to do "something"? Do the things that maximize agility and adaptability!

Well...

People frequently lionize the U.S. ag sector for its productivity...yet is a heavily subsided, protected and regulated, at federal and state levels. No one, even on the right wing (or especially on the right-wing, given Red State politics) ever calls for getting rid of the USDA.

So, does statism work? How to explain U.S. agriculture?

I find the NBER paper laughable on many levels...but then, what U.S. economist would say a heavily regulated, subsidized and protected U.S. industry would be the best in the world?

Our ag sector is said to be....

The Far East nations appeared to grow through state enterprise and state coordination of their private sectors, trade policies, and forced savings and much else...work ethics and trust....brains...

Who is to say an enlightened Maoist regime would do so badly...or maybe that is in fact what has brought China through its recent booms....

It works for the U.S. ag sector, no?

If you argue that the US Ag sector is the "best in the world" and therefore that statism "works", then I think that you need to justify that by considering the following:

1. "Heavily regulated and subsidized" compared with? So, the US is more heavily regulated and subsidised than, say, the sector in the EU? Try growing GM crops there or many other places in the world.

2. Do you suppose that the US, being in a favourable climate zone and having some of the best soil in the world might have something (other than statism) to do with its relative success?

3. Compare and contrast the possibility that the US does relatively well *despite* those regulations and subsidies with the US does relatively well * because of* those regulations and subsidies.

This is just a bit of silliness and doesn't say anything about whether economics is or isn't science. Is physical anthropology not a science because it's still possible to get a wacky paper published in a relatively credible place?

Economics surely still has a long, long way to go in rejecting traditional sub-scientific methods. The problems are still in the core mainstream, not just the wacky fringe. Aggregate fallacies. Ridiculously simplistic and presumptive generalization about psychology that totally ignores the science of psychology. It's no wonder this generation mostly threw itself into empirics and eschewed theory, and not too surprising that some of those empiricists are a whole lot better at analysis than synthesis.

from the paper:
"In this brief and more speculative section we project the path of the Chinese economy until 2050. We consider two projections. The first is the continuation of the post-1978 trends which is the benchmark projection. The second is the imposition of the post-GLF (1966-1978) trends starting from 2013. This second projection can be viewed as a lower bound on future Chinese growth."

There is nothing about abolition of private sector or return to command economy in the paper.

FT article: "They concluded that the abolition of the private sector in China and the return to a command economy would yield an annual average GDP growth rate of 4 to 5 per cent between now and 2050."

Utter misrepresentation of what the paper is about.
The paper assumes that TFP slows down and reforms stop. At the current levels. What has been done has been done, nothing is reversed. The economy remains mostly private.

brilliant of people like you to set things right in this rushed document-intensive world where most just rush through docs, grabbing a few words here and filling up the blanks with our estimations and illusions.

Hi there, every time i used to check webpage posts here early
in the morning, as i like to find out more and more.

I'm impressed, I must say. Seldom do I encounter a blog that's both equally educative and interesting,
and let me tell you, you've hit the nail on the head.

The problem is something which not enough men and women are speaking intelligently about.
I'm very happy I came across this during my hunt
for something relating to this.

Probably because for them marriage involves sacrificing their most treasured
possession - a free-agent p*n**s - and for us, it's the culmination of a princess fantasy so universal, it built Disneyland.

For those who love to collect perfume and are going to want to add Gold by Kim Kardashian to their perfume collection, the product launches with either a 50ml or 100ml
bottle of eau de parfum. A lot of them take advantage of their popularity to launge their own products Like fragrances,
aparrel, weight loss supplements etc. No, it's not a Halloween trick - the
rumors are true. Here is what you need to know: You are enough right this minute.

Comments for this post are closed