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Will China Ever Get Rich?

By Dan Harris on Posted in China Business

I don’t think so.  Just my view.

Read an article in Forbes entitled, “What Could Derail A Middle Class China?” This article starts out by asking what could prevent China from becoming a developed country and then sets out what usually prevents countries from reaching “high-income status”:

The experience of countries that failed to make the jump to high-income status suggest that their inability to innovate and upgrade can be attributed to three broad factors: (1) macroeconomic, political and social instability; (2) persistent inefficient allocation of resources; and (3) insufficient support to physical infrastructure and human capital development.

Though I agree with the above, I completely disagree with the way the article applies (or really fails to apply) these factors to China.  The article lists the following three things as most likely to derail China’s path to riches:

1. Environmental Degradation.  “These problems, if not tackled quickly, are likely to reduce life quality, hamper productivity, drive away investment and, eventually, dim China’s growth outlook.”

2. Increasing Cost of State-Owned-Enterprises.  ”SOEs may also contribute to fiscal risks, as both the state sector and local governments continue to face soft budget constraints, and become a source of social tension.”

3. Financial Crisis.  ”It remains an open question if China’s banks and its financial system more generally could withstand the shocks likely brought about by financial liberalization and opening.”

I minimize all three of these. Both Environmental degradation and the cost of SOEs can be overcome and even if that does not happen, I do not see those failures as enough to prevent China from becoming a wealthy nation. Any financial crisis will have a short-term impact.

No, at this point, what I see holding China back from developed status are far more systemic.  I simply have doubts as to whether China can innovate enough to move from a country based on heavy industry for others to a country that innovates sufficiently to develop big time products/services/ideas so as to make China a 21st century economic powerhouse. I also am skeptical of its ability/desire to substantially improve the living standards of more than half of its poorest 900 million.

For more on China’s chances of escaping the Middle Income Trap, check out the following:

What do you think?

  • Ravenswood

    Uhuh. Dude, sorry to break the news but China became the world’s second largest economy a coupla years back. Does that answer your question?

    • Peter

      So, whether a country is rich or not shall be decided by its nominal GDP? Then yes, China is a very rich country, and Switzerland is dirt poor. Besides, the GDP (even per capita) is not reflecting the countries wealth – how much does one iPhone unit add to the GDP and how much ends up in the pockets of Chinese companies and workers?

      This “Rich China – Poor West” hysteria is getting more extreme for each day. No wonder there’s so much hype about “Rich China” when anyone (Chinese) that makes more than 800 USD is considered as “rich”.. (would an expat make less than 5000 USD he is considered to be poor.. strange logic)

      In the end its not about logic – and its not about substance. These people couldn’t care less if their compatriots where making 3000 RMB a year or 3 million – its about image, or face. That’s why there is no reason to counter this “debate” with facts since its not a real debate to begin with.

  • http://www.inpraiseofchina.com/ Godfree Roberts

    Hmmm.
    1.Can the most innovative nation on earth (see Joseph Needham on this) innovate? Probably.

    2. Can it contain the”increasing cost of State-Owned enterprises”? They’re doing a splendid job of it thus far. The massive reforms have transitioned into fine-tuning but SOEs are only a problem to Austerians and their ideological ilk.

    3. The competence of China’s banks is called into question by someone whose nation’s banks have just continued to demonstrate incompetence and dishonesty of monumental proportions. This is about money, right? We’re talking about the Chinese, right? And we’re ‘wondering’ if the smartest guys in China can manage money.

    Come, come.

  • Nick

    yes, you are right about China not being able to innovate its way to weatlhy nation status since intellectual property theft seems to be state-sponsored or ignored. however, since China is the largest market for many foreign innovation/technology firms, i think that continued theft of IP can actually bring China’s standard of living up very close to Western nations. perhaps China will always remain a few years behind but this difference would be minimal.

    you are also right about the top brass in China not caring about the bottom 50 percent’s well-being. they are providing just enough to them to prevent revolt by the populous. a quick look at the condition of the majority of schools and hospitals or the condition of public transportation outside of city centers is enough to substantiate this claim.

    I think China’s problem is in its inconfidence and to a certain degree to its anti-Japan posture. Japan possesses the most cultural similarities to China out of all the advanced nations in the world. Hence China can reap the most benefits by adopting Japanese customs and technology. One example I want to bring up here is the air quality difference between Beijing and Tokyo. Tokyo’s high air quality is maintained through the combined efforts of the government, private sector and the general public’s consciousness towards conservation, recycling, reuse, etc etc. The Chinese (I also saw the same problem in South Korea) seem to be over-reliant on the “authorities” to take care of problems. The Chinese government also seems intent on building “flashy” infrastructure first; ie, the nation-wide high speed rail system mainly used by travellers. I think that they should have built a rail system for the transport of commodities and goods before any high speed rail system. The current air pollution problem is mainly caused by diesel trucks (used mostly to transport coal to coal-fired power plants) that do not meet the emission standards of diesel trucks used in Western nations and Japan, as well as increased car ownership by the Chinese public. The diesel truck companies are SOE’s so they do not want more stringent emmissions regulations since that would give a huge advantage to Western and Japanese diesel truck makers in the Chinese market.

    Therefore, I think you are correct in your assessments but are too vague. Profits from innovation require a large R and D expenditure so I guess that I actually disagree with you on that point and believe that China can “steal” innovation to wealthy nation status as long as it remains an attractive market where foreign “innovation” firms can make enough profit to make their presence here worthwhile. Secondly, I think for your second point, you need to clarify what you mean by “wealthy nation status”. A low gini coefficient (ie. less inequality?), GDP, GDP per capita, etc. I think that China can achieve a much higher GDP and GDP per capita but there is a good chance that there will be high inequality. Unfortunately, as the population ages and the government’s reluctance to abandon the one-child policy begins to backfire on them, I believe that there will be increased immigration to China from poorer countries to fill unwanted jobs.

    Anyways, I am running out of steam here. Feel free to comment.

  • Jimmy

    Dan, why do you
    think environment constraints will not present much of a problem? In line with
    the economy and increasing urbanization/standards of living – health/safety
    issues due to pollution (air/water/soil) are growing rapidly, nasty emissions
    are growing rapidly (albeit with reductions reported in intensity/per capita),
    constraints on resources supply (water for drinking/industry as one example) are increasing rapidly. Do you suggest China can grow her way through these issues like others have done simply due to the scale of the problems and the current poor platform for implementation of rules and measures to identify and combat them?

    Thanks.

    • http://www.chinalawblog.com/ Dan Harris

      Two reasons. One, I see it as a drag on growth, not something that stops it. Two, what predictions always seem to discount is the ability or the likelihood of change. If the environment becomes too big a drag on growth, I believe China will improve things. That can be accomplished, just as has occurred in virtually every developed country. Much easier to clean up/improve the environment than to “create” innovation.

  • Dan (another Dan)

    I spent some time trying to understand the middle income trap.

    I think you do have a point, that at this time, it’s almost impossible to think China can get rich overall with current theories. It would be hard to reach the same status as the other developed nations.

    However, I think China does have a lot of unique, specific issues to deal with where they can’t fully emulate other countries. Some realities they can’t ignore such as demographics. That alone poses enough challenges to raise living standards. In truth, there aren’t enough resources (on Earth) for most of their people to live comfortably and on par with the wealthier countries. They don’t have to live like Americans, even the more resource conscience Japanese modern lifestyle would be still be hard for Chinese society to adopt because of the strain on resources. WIth current technology and knowledge, it’s still not enough yet.

    On one bright side, I do think there will be innovation, but it will be different than what most people think of when they hear this word. As in, people around the world might not view it as innovative but in essence, it kind of is. I think innovation in China is gonna be very reactionary and localized. In order to raise living standards, they will be force to come up with better ideas, technology, goods and services. Pundits like to say you can’t force creativity, but the truth is being under pressure does bring out a lot of great thinking, in certain aspects. As for innovation being localized, down the line, domestic consumption will take up a large part of their economy, so a lot of activities will be targeted for locals.

    They can get help and ideas from foreigners, (by questionable or “transparent” means) but a lot of activity will be on the ground, so eventually the Chinese will have to relied more on local skills to change life for the better and maintain it.