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Two Paths to Greater Efficiency

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"Two Paths to Greater Efficiency"

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By Matthew Yglesias

Paul Krugman’s 1994 article on “The Myth of Asia’s Miracle” was written before China had gotten rich enough to be generally considered miraculous. But as I’ve passed these ten days in China, I’m increasingly convinced that it’s must-reading for understanding China’s medium-term economic prospects. I won’t try to summarize the piece, but instead will just offer my Krugman-inspired take on what we’re seeing in China.

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The basic story is that living standards ultimate derive from productivity, and there are two ways for an undeveloped country like China to obtain productivity growth. One is to simply shift people out of a low-productivity sector (like farming in China) and into a higher productivity sector (in China, factory labor). Another would be to actually raise the in-sector productivity by getting better at farming or manufacturing or what have you. In the specific case of China, it’s crucial to note that the productivity wedge between sweatshops and rice paddies is enormous which strongly suggests that a huge amount of what China’s achieved has been achieved through the former method. And with agriculture still employing over 35 percent of the Chinese labor force, there’s a great deal more China can achieve through this path. And it’s not a path I think should be slighted. Growth achieved through this method isn’t mythical—the higher living standards are very real. What is mythical, however, is the sense of the miraculous. For the reasons Krugman lays out, there’s nothing miraculous about this and there are real limits to how far you can go with it.

But in China’s specific case, an illusion of miraculousness can be further created by means of simple scale. For example, China is still quite a bit poorer than Costa Rica or Bulgaria on a per capita GDP basis whether you go by nominal or PPP-adjusted GDP. And yet it’s very difficult to imagine either of those countries successfully pulling off an impressive project like the 2008 Beijing Olympics or the 2010 Shanghai Expo or a maglev to the airport. But to a large extent this just reflects the fact that a middle-income country that’s also gigantic happens to have the capacity to dragoon tons of resources into this or that in a way that Bulgaria doesn’t. It’s not obviously, however, whether this is a blessing or a curse. China’s large scale and ability to do impressive things creates an incentive to actually do them. But does hosting an Olympic games or having government-friendly think tanks sponsor junkets for American journalists or conduct a naval expansion program actually improving living standards for Chinese people?

I think the answer is no. Other countries with China-esque per capita GDP but drastically smaller populations don’t face the pressure to waste resources on prestige projects. But the absence of such projects drives home the fact that there’s nothing “miraculous” about the economic performance of Albania. Of course insofar as China is able to use its resource-aggregating abilities to actually get over that productivity hump, that will be a real benefit. But it’s not clear to me that the advantages actually outweigh the benefits, or that anything China is currently doing will really get over that hump. This means very-rapid Chinese growth should continue for a while—as more and more people move off the farms—but will probably slow down dramatically well before China becomes as rich as even the poorer developed countries.

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