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August 1, 2013

MICHAEL HICKS: China hits the wall

It can't continue to move workers from farms to factories.

Faithful readers of this column will recall in 2008 I explained that China’s growth should not be assumed to be a perpetual affair. I hinted that dark clouds loomed over the nation. Over the past weeks, several economists have concluded that China’s economy is in trouble. Let me explain.

For more than three decades, China’s economy has dazzled observers, with annual growth frequently sneaking into the double-digit zone. The wide-eyed narrative of boundless wealth that has accompanied this growth suffers a couple hiccups. First, the accounting of an economy allows for two distinct ways to measure growth. One way is for a nation to add more inputs: workers, capital, technology and raw materials. The other way is to get better at mixing your workers, capital, technology and raw materials to provide goods and services. Most places do a bit of both, but developing countries often focus on increasing inputs, while developed places simply get better at mixing their inputs.

Most of China’s growth over the past half-century has been derived from adding more people to factories and more machines to factories. As it turns out, a nation that can compel workers to leave subsistence farms for bad factories can see its growth accounting soar. To put it another way, China has forced perhaps 300 million people to leave the economic equivalent of 16th-century subsistence farms to work in 19th-century factories. The growth accounting of this transformation appears as an astonishing achievement, but it still means that the average Chinese worker endures a standard of living that is much like that of a Chicago tenement in 1890. But after three decades, the country is running low on subsistence farmers to move to towns.

In order for standards of living to rise, China must get better at mixing its capital and labor within factories. The fact that it is not doing this well should come as no surprise. This requires capitalism; therefore, were the country to become even modestly successful at the rudiments of a market economy it would be the first communist nation to do so. This remains China’s fatal flaw, and like its intellectual ancestors who engineered Stalinist land reforms, its efforts have generated some unwelcomed side effects.

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