China’s Great Transformation

Here is a new paper from Christopher Balding, and it seems to be connected to a larger book project:

How will China transform its economy from middle income to high income country in the coming decades? While economists spend large amounts of time studying debt and demographic challenges, I will take a wider approach to the structural challenges facing China needing to remake society from a middle income to income country.

I consider Chris to be one of the least-heralded very influential people.  Perhaps more than anyone else, he has brought many American elites around to a more hawkish view of China.

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Isn't Balding the guy who is constantly forecasting a crash in China which never occurs. Maybe he shouldn't be considered a reliable source? Tyler has a bias for analysis that supports catastrophic conclusions, which I can understand as it is more interesting than everything will continue to bumble along as it has been doing. He should learn from Bryan Caplan's betting success, which takes advantage of this catastrophic bias in other pundits.

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The reason for more hawkish views on China cannot be attributed to anybody other than China. Muslim concentration camps, organ harvesting, Hong Kong anti-democracy, Taiwan spying and electioneering, dictator for life, the list goes on and on. China arrogantly moved against the status quo instead of working with it.

True that China's (government's) conduct is the ultimate source of its low regard. However, there has been in the past a deliberate effort among China apologists to overlook, rationalize, or feign ignorance of such conduct. Even today, some people continue to insist that Salcedo's list of Chinese transgressions are just signs that China isn't wealthy enough, that economic growth brings liberalization rather than vice-versa. Perhaps, "more hawkish" should be replaced by "less apologist", but Balding would seem to deserve some credit for insisting that we view China with more sober, and open, eyes.

Economic growth does bring liberalization, not vice versa. Liberalism developed in countries that were already the world's richest in the 1800s. It spread in the 1900s to other developed countries. Attempts to create liberal governments in poor countries from India after independence to Russia after the breakdown of the USSR failed. It's not just about wealth per se, it's also about the higher levels of education and national security that wealth bring. Even in the developed West, you see that people with higher levels of education are more liberal, and that people become less liberal when they feel national security under threat. China probably has room to liberalize gradually, but I don't see how any country could realistically liberalize when almost half the population lacks a high school education and it's in the cross-hairs of the world's most powerful countries.

To clarify, liberalization brings economic growth in societies that already have the requisite foundations for it too, so there is a bit of a virtuous cycle. But I think the virtuous cycle is *primarily* in the direction of wealth leading to liberalism. You can see this in the World Values Survey too, public attitudes become more liberal as societies get richer. In the collapse of the USSR, liberalism succeeded in the Baltic States which were more developed to begin with and eventually integrated with the EU which further increased their wealth, while it failed miserably in many other parts of the USSR that did not have the proper foundation for it. In East Asia too, the East Asian tigers developed under authoritarian regimes and become liberal after they were rich. Japan too really laid the foundation for its development under the authoritarian regimes following the Meiji Restoration. It was liberalizing in the Taisho period as a result of the prosperity and suddenly dominance in East Asia that Japan experienced, and then fell into authoritarianism again during the Great Depression, which was caused by trends outside Japan but resulted in Keynesian policies within Japan that strengthened the military, the institution that ultimately created the authoritarianism.

Interesting theses.

China's GDP per capita is $8827 per the World Bank (2018 USD). Japan had $8821 way back in ... 1978. The US hit that level back in ... 1976. Somehow I don't recall any Japanese concentration camps back in the 70s when they were poor.

Even if we want to use other statistics China is not stuck at some feudal level of income; it long ago crossed the the income threshold for most states when they democratized.

Frankly the argument tying wealth to liberalization is pretty weak regardless. Sweden, for instance, was dirt poor in the late 1800s; even managed to have a famine in 1867. Yet political liberalization, far greater than that in China currently, began in 1866.

Nor is Sweden unique. Serbia, for instance, liberalized back in 1903. Bulgaria liberalized in the 20s. Greece arguably began liberalization all the way back in 1844.

In many countries democratization preceded becoming wealthy. In many countries equivalent civic rights for all ethnic/religious groups was achieved while dirt poor.

Color me wholly unimpressed that China, having attained at least 1940s Western incomes, is doing worse than 1920s Eastern Europe.

I could have believed back in the 90s that China was special and developing and the corner would be turned. But they have had at least a decade living with decent income. In that time China has not gotten better, rather they have escalated pretty much all of their anti-liberal tendencies.

And Serbia was engaging in ethnic mass killings less than a century later.

Almost as though liberalization is choice made by polities rather than a developmental milestone which nations pass through. After all some of the least liberal Western states in the 1910s and 1930s were vastly more wealthy than more liberal states in both Europe and Latin America.

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"China's GDP per capita is $8827 per the World Bank (2018 USD). Japan had $8821 way back in ... 1978. The US hit that level back in ... 1976."

You need to use purchasing power parity to compare GDP per capita across countries. Japan didn't get to the U.S. level of standard of living in the 1970s, right?

China's GDP per capita (PPP) is at about $18,000.

The OECD shows that Japan was at that level in 1971, whereas the U.S. was at that level in 1949. Japanese Americans were in U.S. concentration camps five years earlier.

I, of all people, will not claim that the US was perfect in 1949.

Yet, interring Japanese Americans is a pretty far cry from what China does these days. Last I recalled we weren't going for indefinite detention in peace time. Nor were we going after religious expression or penalizing even these citizens for holding religious beliefs not favored by the state. And of course there is the whole harvesting prisoner organs, using the organs of state to censor free speech outside of their borders, and funding all manner of murderous regimes absent anything resembling a greater evil thing going on.

If China were merely some racist state that did evil things during time of war, that would be a decided improvement.

When can we expect China to get to 1949?

China is fully "caught up" to 1938 Germany in most respects.

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Relative wealth is probably more important than absolute income here. For example, the US in 1776 was far poorer than China today, but it was the richest country in the world at the time and therefore fertile grounds for liberalism. Relative wealth is probably more important than absolute wealth because it reflects a sense of security. All humans tend to feel more liberal when they are secure than when they are not and more authoritarian when they are threatened.

Relative how?

The US was relatively less wealthy than China in 1776. If we are talking per capita, then bollocks. The US was in the middle of the per capita out until around the 1850s. Poland was woefully behind in the late 18th century, yet enacted the most liberal constitution in all of European history. Just before WWI, Argentina had double the relative income per capita of Finland and 50% more than Italy, yet Peronism and illiberalism were triumphant.

The truth is many places liberalized before becoming rich. Sweden did so while experiencing grinding poverty that lead to a sizeable fraction of the country emigrating to America. Greece was relatively less wealthy throughout the 19th century, yet was decidedly more liberal than Prussia/Germany.

China is already much wealthier, both in absolute and relative terms, than much of Europe was when they liberalized. China has been for some time.

But ignoring all that, why has China not liberalized as it has grown wealthier? China has gotten wealthier during the Xi era, but has become far more oppressive be it censorship, religious freedom (Christian, Muslim, or cultic minority), or political representation ... China is not moving in the liberal direction.

The relationship between wealth and liberalization is complicated at best and certainly neither sufficient or necessary to a degree which could excuse China's human rights violations or general poor behaviors.

Philosophy and culture buys a country's political system, not cash. This idea that wealth drives ideas rather than vice-versa is ahistorical and sounds vaguely Marxist.

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"Economic growth does bring liberalization, not vice versa."

The two Koreas are a kind of natural test of this hypothesis.

Indeed, both Koreas had authoritarian governments beginning in the 1950s. South Korea got rich and then became liberalized in the 1990s. North Korea stayed poor and therefore remains authoritarian today.

But South Korea was also liberalizing in the 1980s when it was experiencing very rapid growth.

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"We start getting into the good stuff! The risks on this deal are simply enormous. Off the top of my head right from the beginning, leaving aside the Chinese history of cheating on deals, I would have to put the risk that this deal doesn’t see 2021 as close to 50%."

As opposed to countries that feel no need to honor prior agreements .

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Would you say China practices MMT ? They seem to have endless investments without any care of debt being repaid. So far it is working well - they are better off than when it all started.

Massive central new money creation directed toward building out their country. It has seemed to work so far since they have had the resources and labor to fill their needs without onerous inflation. It will be interesting to see how it all evolves as they pivot their economy more towards their people and consumerism as they advance toward the first world.

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Wait, you mean American elites' international outlooks were shaped by someone who spent many years teaching in a Chinese university but couldn't publish a single academic paper (except newspaper commentaries), and who, fearing being fired for lack of productivity, lambasted China's lack of freedom and left for Vietnam (a beacon of freedom)?

Wait, you mean you don't know "ad hominem"?

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Balding? As far as shining a bright light on bad China, no one holds a candle to President Donald J Trump.

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Balding didn't leave China of his own volition: he left after losing his job at Peking University and before being forced to leave. I certainly enjoyed his (twitter) reports while he was in China, but he has become increasingly critical of China beginning with his parting shot and continuing now that he is no longer there. It's understandable, but one must consider his views in light of his own experience. I do agree with Cowen that Balding has great insight about China because of Balding's personal experience living there. Here is a long essay by Balding that recounts his own experience as a foreigner living in China that he wrote shortly after leaving: https://www.baldingsworld.com/wp-content/uploads/2018/08/Innocent-Empiricist-Abroad-081318.pdf

Here is the link to Balding's World (including his latest entry in December about the no trade deal to void a trade war): https://www.baldingsworld.com/

I knew a student who grew up in China but went to college in the US, majoring in economics. About the economic statistics issued by the Chinese government, her comment was "It's all bullsh*t!".

Which agrees with what Balding says in his Innocent Abroad essay, although he took a lot more words to say it. He did have what seem to be good observations about how the Chinese mindset may be affected by dealing with the constant lack of transparency and the duplicity, but I wish he would've concentrated on developing that idea more. Much of that essay ended up being merely variations on the "it's all BS" point.

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The China Miracle is the envy of many developing countries, and China's version of state capitalism appealing to them. Indeed, it may be appealing to some developed countries whose economies have stalled. That, to me, is the China risk. I assume that's why many China observers keep predicting the China economy's collapse that keeps not happening. Cowen and Tabarrok often comment about India's economic development, and sometimes compare it to China's. I linked an essay that identified the difference between the two countries: China picked the initial winners while India didn't (due to cultural differences). It was picking the initial winners that jump-started China's economy and the road to the China Miracle. But picking winners had the downside of promoting inequality: China's level of inequality is higher than in the U.S. Indeed, the unrest in Hong Kong is as much about appalling living conditions of ordinary residents as political freedom: residents prefer to be outside protesting than inside where they are packed in like sardines. Wouldn't it be ironic if China's path to economic supremacy were undone by inequality in China.

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Interesting intro and I look forward to the rest of the book. However, I don't get how he can acknowledge the very challenging poverty facing hundreds of millions of people and then conclude that American elites should be more "hawkish" towards them. American elites generally lead very comfortable and easy lives, principally because of being born in the right place and time rather than any sort of personal merit (and I say this as someone who went to all the elite schools and could have had a decent chance of joining the American elite had I decided to go into government). I find it extremely disturbing that he and American elites think they have the right to suppress living standards for hundreds of millions of people in the other side of the world. At a minimum, America (specifically, the American government) should take a neutral stance towards developing countries. At least in the case of China, which has shown convergence when not suppressed, the poverty in these countries is the result of imperial suppression in the recent past, and they ought to have the chance to develop to first world standards without interference from first world governments.

Yankees look at life as a zero-sum game with a scoreboard, like an NBA basketball contest. If the Chinese, the bogeymen of the moment, improve their life conditions it must have come at the expense of the USA. The big deal now is the Uighurs and their mistreatment at the hands of the Commies. All but a handful of Americans don't know what a Uighur is, where they live or what they do to make the Commies mad. At the same time on this very day in January 2020 almost every baby boy born today in the USA will have the end of his penis chopped off to satisfy some sort of warped tradition, probably without his assent.

This was definitely a good thread to complain about circumcision, well played.

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Asking, “Why nations fail,” perhaps has merit. What does inequality promote? Does inequality help or hinder China?

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Who are the contemporary non-American commenters on the US-- the Tocquevilles of our time, if you will-- that are as worth reading as Balding on China? Chemi Shalev of Haaretz comes to mind; are there others?

Similarly, it would be very interesting to read a survey history of the US originally written in a non-English language for a non-English speaking audience. Are there any good ones that have been translated into English?

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Tyler - I would love to see a debate between you and Sumner on China. Are you up for it?

+1

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There is ample opportunity for Sumner to get some skin in the game, by buying real estate there, and enjoy the arbitrage benefits of increased living standard. Unlike some people with actual skin in the game, who started with a romance with China, but later voted with their feet to leave, Sumner does not warrant the deference he receives as a "China expert".

These guys spent 10 or so years there, made a living, learned the language, and started families:

https://www.youtube.com/user/laowhy86
https://www.youtube.com/user/serpentza

And they left by choice, unlike Balding, although it seems Balding did leave by choice indirectly, as his conscience kept him from towing the line in comfort, and ultimately his contract was not renewed.

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The relatively new Jaw-Jaw podcast is also a fantastic China resource, especially the episode with Edward Luttwak.

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Not only has fracking changed our relationship with the Middle East (why are we still over there?) but it has also changed our relationship with China. So when America experienced its quiet energy crisis from 2001-2008 the global elite believed most manufacturing would move to China because only China was willing to poison its people with coal pollution and displace millions with hydropower. Fast forward to today and thanks to fracking for natural gas manufacturers are comfortable investing billions in North America in order to manufacture SUVs. So I remember numerous columns predicting we would be driving Chinese made cars by now but it never happened.

Interesting observation. Adding 50,000 Lexus ES 350 models will transform a Kentucky plant into the largest Toyota factory by volume in the world.

Yes, the trend seemed to start around 2015 with major announcements about new factories and expanded factories by auto manufacturers. So fracking for natural gas had proven economical by then and the American economy was improving and fracking for oil started bringing down the price of oil in 2014. Atlanta seems to be at the center of this new SUV manufacturing region with Mercedes Benz moving its North American HQ there.

At the same time, none of the fracking companies and their suppliers have been profitable in this era. Before ending her role as chairman of the Fed, Janet Yellen was complaining that oil prices were <b<too low, creating unemployment in the industry: A second concern relates to the prospects for commodity prices, particularly oil. For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms. In the case of countries reliant on oil exports, the result might be a sharp cutback in government spending; for energy-related firms, it could entail significant financial strains and increased layoffs. In the event oil prices were to fall again, either development could have adverse spillover effects to the rest of the global economy. See here. It's quite likely that if oil prices don't rise substantially the fracking boom will come to a halt and the Fed will need bail out that portion of the energy industry.

The economic story of 2016 was how strong the economy was in light of Texas’ .3% GDP growth. So if lower oil prices were going to have a negative impact it would have occurred several years ago. What happened is frackers took a hacksaw to their balance sheets and cut costs. Plus fracking for oil is moving to the Permian Basin which means costs can be cut even more.

From 2001-2007 only one major economic indicator was above average for America—corporate profits. So the quiet energy crisis of that period produced a lack of confidence in our economy AND more confidence in China...now Fortune 500 CEOs are confident America will have cheap natural gas for the foreseeable future.

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He would be great on your podcast

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Let me explain. If you can unilaterally change or abrogate an agreement you enter into, you have no binding moral or legal recourse as regards your agreements. At best, the agreements are statements of intention from each side to abide by the agreement as long as they can, from their point of view.

"During the 2016 U.S. presidential election, Donald Trump's campaign included the promise to re-negotiate NAFTA, or cancel it if re-negotiations were to fail. Upon election, President Trump proceeded to make a number of changes affecting trade relations with other countries."

There is no reason for any other country to refrain from doing the same. The same with torture or war crimes. If the US can define these actions for itself, so can anyone else. That's the art of the deal thanks to Trump. When you negotiate with Trump you can leave morality out of the equation, since he obviously will.

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Bruno Macaes on Twitter, Dec 04 2018:

"An awful time for China expertise in the West. Some Western experts, believe it or not, never lived in China. Many of those who have came back with a personal grudge of some sort. Especially the academics, who maybe hoped to be treated with adulation. Almost no objective analysis."

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