Why China won’t catch-up with USA

Mar 09, 2021

Spoiler: The Chinese growth is slowing down. Communist China will never be able to make it to the richest economies even if it becomes the largest economy due to its size. Even if the Chinese has moved up the value-added ladder, it will become never become as innovative as USA.

Knowledge and innovation are not only cumulative, but they are also collaborative processes. The formation of these depends on interactions between scientists, researchers and other people involved in the innovation process. Free access to flows of information and knowledge is reinforcing the processes. Such conditions are more often found in democracies than in autocracies which explains why the former type of countries are more attractive to live and work in. Furthermore, scientists and researchers that move from autocracies to democracies become more productive.

Further obstacles are the prioritization of the SOEs and the demographic change. Pouring investments and ordering banks to throw good money after bad is hampering growth. The Chinese working age population is getting older and smaller. But the communist regime is committing is committing genocide instead of trying to reverse that development.

I have rambled about the relationships between institutions and prosperity in previous posts, here, and here about countries in general, and here and here using specific countries as bad or good examples.

These posts show that people in democracies live better lives. They are freer and more well off than people in autocracies. I used GDP per capita in the above-mentioned posts to measure “well off”. Since GDP per capita levels today are the results of previous generations’ economic activities, it might be obvious that free and democratic countries are better environments for innovation than autocratic countries.

But China!

Tankies regularly go bananas over statistics showing that China is about to become the largest economy in the world. These tankies, who have a soft spot for the mass murderer Mao, never mention the fact that the Chinese growth occurred after the abolishment of Mao’s idiotic economic policies that led to millions of people starving to death.

And for obvious reasons they don’t ask themselves why the most populous country in the world didn’t become the largest economy in the world a long time ago. And they definitely don’t want to enter into a discussion on what matters, total GDP or GDP per capita. So, let's have a look at that, by relating GDP per capita in both China and USA to the US level in 2000. And doing that shows that there is now way that China will catch-up with the USA in the next century, c.f. Figure 1.

Figure 1. GDP per capital relative to USA in 2000.

Source: Penn World Table version 10.0. https://www.rug.nl/ggdc/productivity/pwt/?lang=en

And as history shows and detailed by Acomoglu and Robinson in Why Nations by, autocratic countries can only generate growth temporarily. Well-known examples are the communist countries in Eastern Europe and Soviet Union where growth was created through massive investments. But the growth stagnated as the declining return to capital kicked in. A production aimed at fulfilling five-year plans instead of consumer demand, weak incentives for innovation led to finally to increasing inflation and collapse of the communist economies. Countries where research and development is controlled by the state, can show progress in a few areas which are prioritised as Soviet Union’s success with Sputnik and satellites demonstrate. But governments and bureaucrats do not know which products that will be in demand tomorrow and therefore not which technologies that are necessary to produce those products.

Deng Xiaoping who came to power after Mao’s death had first-hand experience Mao’s failures and understood what was going on in the Soviet Union. He therefore introduced market reforms and opened up China to the rest of the world. These policies have been successful. In the beginning of the period of reforms, the Chinese economy was specialised in low-technology labour intensive production. China now has many firms producing high-technology products and is regarded as one of the world’s fourteen most innovative economies according to the Global Innovation Index.

Innovation is higher in countries where people are free

But Chinese growth will stagnate. The reason is its institutions or political system which is also highlighted as a weakness by the Global Innovation Index. Innovation-led growth can only occur permanent in countries where people have access to free and uncensored flows of information which they are free to share and discuss with others.

Sustained innovation-led growth can only take place in democracies with institutions that guarantee people with freedom of information, media and speech, and where the citizens are protected by its judiciary from oppression by the government and its authorities, c.f. Figure 2.

Figure 2. Human Freedom vs Innovation.

Source: Human Freedom: Fraser Institute, https://www.fraserinstitute.org/studies/human-freedom-index-2020 Innovation: Global Innovation Index, https://www.globalinnovationindex.org/Home

Zooming in on the most innovative countries in Figure 1, shows that China is an outlier. Most of the countries are democracies. Besides China, Hong Kong and Singapore are autocracies. While the Chinese communist regime is crushing freedom in Hong Kong, Singapore may turn democratic just as South Korea and Taiwan.

Innovation is a collaborative process which works best in free countries like the USA

Knowledge is cumulative. By adding to the existing knowledge stock, scientists and researchers read what others do, discuss their projects, and co-operate with other scientists and researchers. The less they are limited in their search, discussions, and choice of scientific fields, the more they can add to the existing knowledge stock. This means that scientists and researchers’ productivity is higher in environments where they have free access to flows of information and are free to interact with other people in any field of science.

And while communist China has benefitted from allowing its scientists and researchers work abroad, the CCP keeps the lid tight on the academics at home, c.f. Figure 3.

Figure 3. Freedom and academic and cultural expression in China and USA.

Source: Varieties of Democracy. https://www.v-dem.net/en/ Note: The indicator ranges from 0 to 4 where 0 indicates that Censorship and intimidation are frequent. Academic activities and cultural expressions are severely restricted or controlled by the government and 4 indices no restrictions.

researchers are attracted to the network of universities, high-technology firms and innovation clusters like the Silicon Valley. Hordes of talented people go there in order to tap into the flows of knowledge, exchange ideas and realise their projects. USA is the world’s research park as this excellent blog post put it.

The differences between the two countries explains why China is the least and USA the most attractive country for foreign inventors, c.f. Figure 4.

Figure 4. Global migration of inventors 2001-2010.

Source: Miguelez & Fink (2013). Measuring the International Mobility of Inventors: A New Database. WIPO Working Paper No 8. https://www.wipo.int/publications/en/details.jsp?id=3952&plang=EN

USA also accounts for the largest share of receiving inventors from abroad. (Another interesting, and expected, observation is that no inventors move to Russia.) And an interesting observation is the large share of patents in the USA that are applied by Chinese immigrants who prefer to work and live in USA.

Not only is USA more successful as a location in quantitative terms but also in qualitative terms which this study shows. Foreign scientists and researchers that relocate to the USA are six times more productive than migrants to other countries. So, it is no surprise that “among Nobel Prize winners and Fields Medalists, migrants to the U.S. play a central role in the global knowledge network— representing 20-33% of the frontier knowledge producers.”

And USA benefits greatly from this advantage in the development in new technologies such as Artificial Intelligence where USA has taken the lead much due to its immigrant inventors from (have a guess) mostly China but also from other countries. Meanwhile, China sees its AI-researchers go abroad.

Curbing the private sector and increasing the CCP’s control won’t help growth

China also faces other problems. The State-Owned-Enterprises (SOEs) constitute a significant share of the economy. These are very inefficient. Increasing investments in them is a drag to the growth at existing shares of GDP. And further increasing their share by forcing the banks to pour money in the SOEs will further hold back the growth

This has been going on for a while and China is about to hit a wall. Even though the return on equity in SOEs kept declining between 2012 and 2018, the assets of state companies grew well over twice the pace of expansion of China’s GDP. China has been overinvesting (relative to consumption and GDP growth) for many years and it is very unlikely that the CCP’s efforts to further boost its SOEs at the expense of the private sector going to increase growth.

demographics will be a drag…

As if the above-mentioned bad policy choices weren’t enough, the demographics don’t look favourable. China’s working age population has stopped growing and is projected to continue decline. It is also older than the US working age population.

So, the genocide of Uighurs is not only cruel but stupid

Committing genocide of the minority with the highest birth rates is not only indescribably cruel, but also incredibly stupid when you have a ticking demographic timebomb. But the CCP does not have a history of smart decisions and this one is just what the mass murderer Mao would have done.

Forced sterilization of Uighur women have caused birth rates in Xinjiang to decline dramatically, c.f. Figure 5.

Figure 5. Birth rates in China 2010-2019.

Source: Compiled by John Stone () and uploaded on https://github.com/jnzst/china-birth-rates. Note: Original data from different editions of China Statistical Yearbook can be found on the website of Naional Bureau of Statistics China. http://www.stats.gov.cn/tjsj/ndsj/2020/indexeh.htm Different editions are available by changing the year in the link.

The Xinjiang development 2017-2019 is dramatic. And extremely large compared to all other regions in China, c.f. Figure 6.

Figure 6. Birth rate changes in China 2017-2019 (%).

And it would be even more dramatic if the graph only showed Uyghur birth rates. Xinjiang birth rates also include the majority population Han’s birth rates. Adrian Zenz has dived into Chinese population statistics and shows how the Chinese authorities forced sterilization of Uyghur women was the brutal regime’s response to the decline of the Han population’s share of total population in Xinjiang.

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