China’s relative economic growth during the past 80 year

Although China’s growth has been pretty spectacular during the past few decades, I have often heard it argued that a significant source of growth has simply been the unwinding of many decades of economic mismanagement. In order to test this I went onto Angus Maddison’s magnificent website where he tries to calculate real GDP (on a PPP basis), population and per capita GDP for every country over the past 2000 years until the year 2003. Obviously this is an immensely difficult thing to do, and there are large gaps in his data, but his is the most complete data set I know.

The graph below lists China’s per capita GDP as a share of that of what I think to be the four most culturally comparable countries or provinces – Japan, South Korea, Taiwan and Hong Kong. As the graph seems to indicate, during the first three decades after 1949 China’s economy slid very rapidly relative to its neighbors, and in the subsequent three decades it began to long process of narrowing the gap. image002_50.gif

In 1929, China’s per capita income, for example, was roughly 30% of that of Japan. By 1949 it had declined to 23% of Japan’s as China suffered the depredations first of war with Japan and then civil war between the Nationalists and the Communists.

After the war years things got relatively worse as China’s neighbors enjoyed growth rates far in excess of anything China could muster. Of course per capita incomes in China did slowly increase during most of those years, but not nearly as fast as Japan’s or most of China’s other non-socialist neighbors. As a consequence Chinese incomes began a rapid relative decline, so that by the mid-1970s Chinese earned about 9% of what their Japanese counterparts earned. Since then China has experienced an equally rapid climb back to 23% of Japanese per capital income by 2003, although much of that relative growth occurred during the stagnant Japanese decade of the 1990s. Maddison does not have figures for Hong Kong before 1949, but after that year Hong Kong incomes track Japanese incomes fairly closely.

The relative numbers are more dramatic, not surprisingly, for the two poorer comparable counties. For much of the first half of the 20th century Taiwanese and South Koreans earned roughly twice what their Chinese counterparts earned. Beginning in the early 1950s as Korea and Taiwan took off and as China stagnated, the income of the average Chinese sank to 25% of the average Korean and 18% of the average Taiwanese, before Chinese incomes began recovering slowly in relative terms in the late 1970s. As of Maddison’s latest numbers (the year 2003), Chinese earn a little less than a third of what their counterparts in Taiwan and Korea do. China still has a long way to go before returning to its average relative position in the first half of the 20th Century, but it has clearly turned the corner.

The conclusion from the first graph is that in spite of the tremendous catching-up that has taken place in the past three decades, China has still lost ground. It is still far behind its position relative to its neighbors at the beginning of the six decades since 1949. That might suggest that indeed much of China’s recent growth boom may simply be the consequence of unwinding two decades of severe economic mismanagement

But that conclusion is not necessarily fair. Japan, South Korea, Taiwan and Hong Kong are among the best performers among China’s neighbors. For some reason I can’t put more than one graph on this site, so I cannot show it graphically but on my worksheet I charted China’s change in per capita income relative to that of four other large and less successful Asian neighbors — Malaysia, Thailand, Indonesia and the Philippines.

The story here is much more mixed. Their own political and social problems after the Second World War meant that economic stagnation in those countries matched that of China, until the 1960s when all four countries began widening their gap with China. By the early 1980s however, China had recovered much of the lost ground with Thailand and Malaysia so that the average Chinese was once again earning around 60% of what his counterpart in those two countries earned — China’s per capita income was broadly 60% of theirs both before 1949 and after 2003.

Although China has just caught up with those two (in relative terms), it has more than done so with Indonesia and the Philippines. From roughly 20% below in the late 1940s and early 1950s, Chinese per capita income lost ground in relative terms until the late 1970s and early 1980s, but thereafter grew so rapidly in relative terms that in recent years Chinese per capita income has significantly surpassed that of Indonesia and the Philippines (140% and 190%, respectively).

The experience of China relative to these two countries makes it harder to argue that China is simply recovering some of the ground it lost during the disastrous first two decades after 1949, although of course both of these countries have had very difficult economic histories themselves, and tracking the performance of China against these two does not lead to any obvious conclusions about the reasons for Chinese outperformance.

The real question of course is whether China can keep up these growth rates and eventually make up for all of the ground it lost relative to a wider group of its neighbors. I have not had the time or resources to check the dependency ratios in these eight countries and provinces, so a straight comparison of per capital growth rates between them may conceal a lot. Remember, as I discussed two weeks ago (“Demographic projections and trade implications”), China switched from having a rapidly deteriorating dependency ratio during the first two-and-a-half decades after 1949 to a rapidly improving dependency ration since then. After 2010-2015 conditions will change again, and China’s dependency ratio begins to deteriorate quite dramatically. All of this necessarily affects per capita income growth.

2 Responses to "China’s relative economic growth during the past 80 year"

  1. DC   June 10, 2008 at 11:07 am

    China economy eyes post Earthquake gain in social capital (Reuters) – It’s callous when nearly 70,000 people lie dead to wonder whether anything good economically could emerge from the rubble of last month’s Sichuan earthquake.But as well as a short-term boost to output as reconstruction kicks in, there is a chance that the outpouring of civic spirit in response to the disaster may not only reshape China’s politics but also strengthen its economic foundations.The idea of social capital as a long-term driver of growth is well known to academics. The U.S. political economist Francis Fukuyama identified social cohesion as one reason why Japan and Germany recovered so quickly after World War Two.Chinese researcher Zhao Yandong, who has studied post-disaster recovery, says that if a community has trust only among people who know each other well, its prospects for getting back on its feet are not bright."Only when trust breaks through this circle of familiars and expands to include trust in strangers and institutions is the post-disaster revival of victims assured," he wrote in the Chinese-language journal "Sociological Studies" late last year.Economists Ting Lu and TJ Bond with Merrill Lynch in Hong Kong are optimistic that trust can indeed put down deeper roots.They believe the quake has created a platform for improved coordination and governance. They see signs in the way the disaster was handled of a more open society that will demand more accountability from governments and developers, building trust and trustworthiness."Loss of human lives cannot be measured in value, but we believe the loss in physical capital is far outpaced by the gain in social capital, which, through better institutions, could be the single most important factor for long-term stable and sustainable growth in China," they said in a research report.

  2. DC   June 10, 2008 at 11:20 am

    Michael Pettis,Alittle over two centuries ago, economic historians recognize that the Chinese economy was the world’s largest. The last century characterized by the Cold War era was an aberration. The world is simply returning back to its historical state post Cold War. The modern silk road of steel railways between Asia and Europe will shift the center of global economic power back to Eurasia from the America’s. At this point, China’s rise back to the regional Superpower across East Asia is all but assured. The US is increasingly a spent economic and military power that will retreat back to the North American continent sooner or later.