The good news about China is that economic liberalization has produced impressive growth in recent decades, which has helped bring hundreds of millions of people out of poverty.
The bad news is that China started from such a low position that per-capita income is still quite low compared to rich nations.
So what does the economic future hold? Will China continue its upward trajectory?
That’s certainly possible, but it depends on the Chinese government. Will there be additional liberalization, giving the economy more “breathing room” to grow?
Not if the government listens to the bureaucrats at the International Monetary Fund. I wrote three years ago about an IMF study that recommended huge tax increases in China.
And now there’s another IMF report pushing for big tax hikes. Only instead of arguing that higher taxes somehow will produce more growth by financing a bigger burden of government (which – no joke – was the core argument in the 2105 study), this new report claims higher taxes will produce more growth by reducing inequality.
Here’s the basic premise of the paper.
…economic growth has not benefited all segments of the population equally or at the same pace, causing income disparities to grow, resulting in a large increase in income inequality… This is especially of concern as the recent literature has found that elevated levels of inequality are harmful for the pace and sustainability of growth… The paper discusses what additional policies can be deployed to improve equity in opportunities and outcomes, with particular focus on the role for fiscal policy.
But a key part of the premise – the blanket assertion that inequality undermines growth – is junk.
As I noted in 2015 when debunking a different IMF study, “..they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.”
Let’s dig into the details of this new IMF study.
Here’s the problem, at least according to the bureaucrats.
Income inequality in China today, as measured by the Gini coefficient, is among the highest in the world. …Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990.
And here’s the chart that supposedly should cause angst. It shows that inequality began to rise as China shifted toward capitalism.
But why is this inequality a bad thing, assuming rich people earned their money honestly?
When markets are allowed to function, people become rich by providing value to the rest of us. In other words, it’s not a zero-sum game.
Ironically, the IMF study actually makes my point.
…much of China’s population has experienced rising real incomes. …even for the bottom 10 percent incomes rose by as much as 63 percent between 1980 and 2015… This has implied that China reduced the share of people living in poverty immensely. Measured by the headcount ratio, the population in poverty decreased by 86 percentage points from 1980 to 2013 (see figure 6), the most rapid reduction in history.
And here’s the aforementioned Figure 6, which is the data worth celebrating.
Any normal person will look at this chart and conclude that China should do more liberalization.
But not the bureaucrats at the IMF. With their zero-sum mentality, they fixate on the inequality chart.
Which leads them to make horrifyingly bad recommendations.
…several reforms could be envisaged to make fiscal policy more inclusive, both on the tax and expenditure side. …revenues from PIT contribute only around 5 percent of total revenues, a much lower share than the OECD average of 25 percent. Increasing the reliance on PIT, which more easily accommodates a progressive structure, could allow China to improve redistribution through the tax system. …While the PIT in China already embeds a progressive schedule with marginal rates increasing with income from 3 to 45 percent, …redesigning the tax brackets would ensure that middle and high income households with higher ability to pay contribute more to financing the national budget… Property and wealth taxes remain limited in China. Such taxes are broadly viewed as progressive, because high-income households usually tend also to have more property and wealth. …Consideration should therefore be given to adopt a recurrent market-value based property tax.
And why do IMF bureaucrats want all these additional growth-stifling taxes?
To finance a larger burden of government spending.
China still lags other emerging economies and OECD countries in public spending on education, health and social assistance. …social expenditure will need to be boosted.
In other words, the IMF is suggesting that China should copy welfare states such as Italy and France.
Except those nations at least enjoyed a lengthy period before World War II when government was very small. That’s when they became relatively rich.
The IMF wants China to adopt big government today, which is a recipe to short-circuit prosperity.
P.S. I don’t think the IMF is motivated by animus towards China. The bureaucrats are equal-opportunity dispensers of bad advice.
P.P.S. The OECD also is trying to undermine growth in China.
P.P.P.S. There are some senior-level Chinese officials who understand the downsides of a welfare state.
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a knife to a gunfight?
“Art Laffer’s Chinese Curve Ball”
BY DAVID P. GOLDMAN AUGUST 24, 2018
https://pjmedia.com/spengler/art-laffers-chinese-curve-ball/
most European international organizations have a political agenda to promote… they are doing their part to prepare the world’s population for a globalist government… one based on Marxist socialism… central governance… and redistributionism… many of these folks are crypto communists… and should be afforded the appropriate degree of credibility and respect… because we all know…………. this time they’ll get it right……………….
China is a middle freedom country. So, broadly speaking, its equilibrium point is as a middle per capita income country. China’s prosperity is still relatively down from this equilibrium point, so it still has quite a bit of room to grow at rates that are almost double the average world growth rate.
So, the trendline remains for China to become the dominant world economic power, and likely soon after also the dominant military power. Of course this is one area where size is not that relevant. Better wealthy in small (but expensive to conquer — not least because of its armed citizenry) Switzerland than poorer in superpower China. Sure a major superpower could overtake Switzerland but the Swiss have made that a very expensive proposition, likely not worth the cost (though I think that the Swiss spending 0.5% of their GDP towards a few nuclear warheads would be money well spent, a government expenditure that is still on the rising portion of the Rahn Curve). But in any case the subject is China…
The more pertinent question for us western world voter lemmings is what will happen once China reaches that middle income equilibrium point. My bet is that unless China liberalizes further its growth will stall, or at least merge down into world average growth levels, or below, like the western world’s voter lemming statist democracies.
However, mind you, by the time China and India reach these equilibrium points they will have economies that are larger than the US and Europe combined. This transition from a western dominated world to an eastern dominated world is well underway and scheduled to complete by around 2040 on current trendlines.
Will western world voter lemmings wake up and take their foot off the pedal of coercive collectivism? As the rise of statist politicians like Bernie Sanders indicate chances are that they will not. To the voter lemmings a redistribution trillion today will remain more valuable than five perpetually and exponentially growing trillions in the future.
So, no, western world voter lemmings will not wake up. At least not en masse, and here is where the hope for a freer and much more prosperous world lies. My hunch is that some western world voter lemming democracies will indeed escape this fate of statist decline, mostly for serendipitous reasons. Spot these countries early and you will be well on your way to the freer and unimaginably prosperous world awaiting us in just a few decades.
Inequality:
Inequality is here to stay. As the exponentially growing leverage the human mind has on the natural state of things keeps advancing, at ever more unimaginable speeds, so will disparities. But those who fight disparities are doomed. My dog is on the verge of now having a better life as a pet than as a free equal citizen in Venezuela. I believe the laissez faire capitalist trendline growth rate of an already advanced and inequality unrestrained economy to be around 5%. A this rate average real per capita income will have grown to $3 million per person by the turn of the century. By contrast, in a euro like statist country on a 1% growth trendline average per capita income will have risen to just over $110k in the same timeframe. Where would you rather be? Where would you rather your children live? In the bottom quintile of the first country or the middle class in the second? In the end, whether one can live with the sight of the mansion at the end of the cul de sac, without much envy, will determine their ultimate prosperity. The feeling of equality does indeed have some value but people are completely off basis when it comes to the magnitude of future consequences. Would you rather take your chances in an unequal society with average per capita income of three million or would you rather be more equal (and likely ruled by cronies) in a society with just one hundred grand average income? North Koreans looking at Singapore already know the answer to that — but most western world voter lemmings are oblivious to the fact that they face the same fate within the span of just a few decades.
But the future is likely to be even more radical than that. Human growth is not only moving along, but the exponent itself is accelerating. We, as humans, went from virtually zero growth throughout most of our existence and history to half percent growth during the renaissance to one percent in the nineteenth century to two percent in the early twentieth then three percent late twentieth and now entering the twenty first century at around four percent global growth.
Ponder this for a minute. The time to the next major increase in growth rates keeps decreasing… ponder the implication… the exponent itself seems to be growing… perhaps even exponentially. The current tendency even implies a five percent world trendline growth rate by around 2025, seven percent by 2032, ten percent by 2050… …the future is likely to be more radical than most imagine. Of course you were not likely to get very far in 1750 by appearing in front of the enlightened sages of the time and stating that after hundreds of thousands of years of humans being earth bound they would take flight into the clouds within less than a mere two centuries. The progressive big religion hippies of the time might have even burned you at the stake. Today the green hippies of sustainability will accuse you of runaway growth ideas and will box you and your family into a five hundred square foot apartment by the mass sheep transit station, reading Al Gore books while eating biomass, three annual passes to the wilderness and a stent on your Vas Deferens so that your descendants do not increase the carbon footprint.
Alas, the steamroller is coming…
The pace of everything human is now reaching breakneck velocity — and further accelerating! Events and environments beyond our imagination are not very far out… the time is not far where lemmings will go from world leaders to laggards in just a few decades… are you ready?
P.S. When I read stuff like this I do wonder whether the typical weighting factors on the economic world freedom rankings are indeed correct when it comes to correlating growth (and thus prosperity) with economic freedom score.
P.P.S. IMF: When your paycheck depends on big government it’s really hard to have an anti big government mentality. It’s a voter lemming financed suicidal propaganda machine.
A focus on economic inequality is irrational. Here’s my recent post on this general topic:
The only possible excuse for obsessing about inequality is if it truly retards economic growth. But I just can’t buy that theory.
To believe something is true, I want not only supporting data, but a sound theory that explains it. I am a data geek, but I also realize that economic results can be heavily influenced in the short-term by human emotions, changing preferences, and various ‘noisy’ events from the economy or Mother Nature.
So, I want a sound theory as well, and I don’t see one that explains how inequality retards growth. Keynesian ‘consumer spending’ arguments don’t cut it with me.
Inequality does not mean that the poor are getting poorer. It means the rich are getting richer faster than the poor are getting richer. That spells g-r-o-w-t-h. Furthermore, the typical ‘equality’ solution to take from the rich to give to the poor can only harm growth.
I cannot escape the conclusion that focusing on inequality is simply irrational.