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Here’s Tyler Cowen:

Does China hitting the wall reflect a deeper reality about emerging economy growth? It’s easy enough to say the Chinese economy is slowing down and that is creating problems for some other countries around the world. Never settle for such a comfortable understanding! Might there be deeper ways to think about the problem? I am not endorsing any of the following speculative hypotheses, rather they are attempts to imbed the Chinese slowdown into what is possibly a broader framework. Here are a few possibilities: 1. We’ve been realizing that autocratic government isn’t as effective as we had thought. 2. We’ve been realizing that virtually all of the world’s emerging economies will be hit by “premature deindustrialization,” China included. China will produce more manufactured goods, but because of automation this will never build a fully-sized middle class in China. And historically service sector jobs have never had the same kind of oomph at lifting a nation over various development hurdles. The same limitations may apply to a variety of other countries.

Counterarguments:

Tyler seems to imply that it is clear that China has hit a wall. But the consensus forecast for China is 6.9% growth this year, and 6.7% next year. My forecast is 6%.

China’s development so far has looked a lot like the other East Asian tigers, and almost nothing like the places that did hit a wall (Russia, Turkey, Brazil, Indonesia, South Africa, etc.) The East Asian tigers have now become fully developed economies.

I don’t think anyone believes the Chinese recession (if it occurs) will be anywhere near as bad as South Korea’s 1998 recession (or even 1980)—and yet Korea went on to become a fully developed nation in just another 15 years! (China will obviously take a bit longer.)

As far as premature industrialization, it hasn’t hit Taiwan or South Korea. Hong Kong got rich despite deindustrialization. Of course China’s much bigger, but it has shown no sign of being unable to provide a middle class lifestyle for tens of millions of Han people in coastal areas, and I see no reason to believe the same can’t be done for hundreds of millions more Han people in both the coastal areas and the interior (and probably minorities as well.) It’s really up to the Chinese government; will they do the necessary reforms? I think the answer is “probably yes.” Tyler seems to suggest that services are less essential that goods in the development process. Actually, China can clearly provide it’s citizens with the housing and appliances necessary for a middle class lifestyle, that’s not even in doubt–the real question is the service sector, can they make it more efficient?

Test question: How many countries that have cultures that are obsessed with education, saving, and hard work have failed so far? (My guess would be China, Vietnam and North Korea, and I don’t expect any of those three to get “stuck”. Which countries did I miss?)

Agreement:

On the positive side, I strongly agree with Tyler’s point #1. I’ve always thought democracy leads to better economic outcomes than autocracy, and I believe China would be much better off today if it had been democratic since 1949. Unfortunately, because I believe Tyler will be wrong about China, it will become harder for me to make that argument.

I also agree with Tyler that it’s too easy to say emerging market problems are due to China. In my view Brazil’s problems are due to Brazil.

PS. Unless I’m mistaken this reform will make China’s data more volatile, and could substantially reduce reported Q3 growth.

China’s statistics bureau said on Wednesday it has changed the way quarterly gross domestic product data is calculated, a move it calls a step to adopt international standards and improve the accuracy of Chinese numbers. . . . Now, China is calculating GDP based on economic activity of each quarter to make the data “more accurate in measuring the seasonal economic activity and more sensitive in capturing information on short-term fluctuations”, the NBS said. Previously, China’s quarterly GDP data, in terms of value and growth rates, was derived from cumulated figures rather than economic activity of that particular quarter, the bureau said. The new methodology – in line with that of major developed countries – will pave the way for China to adopt the International Monetary Fund’s Special Data Dissemination Standard (SDDS) in calculating GDP, it said. The bureau, which has revised some historical quarterly GDP figures for 2014 and prior years retrospectively, said it will publish third-quarter GDP data, due out on Oct. 19, based on the new methodology.

I never knew they used cumulated figures—no wonder the changes were so gradual.

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