Sunday Spectacle CLVIII

Will China Ever be As Rich as USA?

China's total GDP will surpass USA within a few decades simply due to its larger population. But will each of its citizens be as rich as USA soon?

There is nothing to say China—or some other country—won't ever surpass the wealth of USA on a per capita basis, but it's not as likely as many assume. The Federal Reserve Bank of Dallas examined this question in their June 2011 Economic Letter (bolds by me):

So, is it likely that Chinese living standards will ever match those in the U.S.? To get a handle on this question, it is useful to look at other countries’ experiences over a long period. Many nations underwent development miracles in the latter half of the 20th century. Reviewing data on the evolution of global living standards over the period reveals two interesting facts. First, there are several countries where per capita GDP exceeds that of the U.S., often by significant amounts. Almost all of these nations are oil exporters. For them, per capita GDP may not accurately measure living standards because a significant component of economic activity involves depleting the country’s natural resources or wealth. Thus, we exclude those nations from the analysis.

Second, other countries with per capita GDP significantly exceeding the U.S. level are generally small, with large, offshore financial centers. Given the well-known difficulties associated with determining financial-sector output, per capita GDP in such nations may not accurately measure living standards. So we also exclude them.

The FedRed examined data of all the countries, excluding those filtered out as described above, over the last 50 years and produced the following scatterplots:

The chart above shows growth rate (y-axis) versus real GDP per capita (which is a proxy for income). It should be obvious how as we move to the right (income increases), growth rates slow down. According to this data, barely any country grows beyond 10% per year (real) once GDP per capita surpasses $10,000 or so (do note that some oil-rich and tiny, financials-oriented, countries are excluded).

The second chart is a bit more confusing and illustrates how countries perform as they get closer to the US GDP per capita level. Since the US GDP per capita has varied over time, this chart is way more confusing than it seems and it's hard to discern much from it.

The best chart of the bunch is the one above. It shows G7 members, which includes some super-star growth countries in the post-war period. Countries like Germany (dark-green square), Italy (grey), and Japan (aqua) had spectacular growth in the post-1950's period as they were rebuilt from a low, war-destroyed, level. Even with amazing growth, the fast-growing Germany, Japan, et al, have not been able to surpass USA's GDP per capita.

The country that is closest to USA, in terms of wealth, is Canada (purple). One can think of Canada as the slightly-poorer neighbour down the street. Canada hasn't seen as strong a growth as Europe but it has kept pace with USA. As USA became wealthier (move to the right on the chart), Canada has grown at a similar level (the vertical gap to the 100% line has generally stayed the same).

The author finishes his report by saying,

Why do countries fail to reach U.S. living standards? Therein lies something of a mystery. Economists speak of a middle-income transition, or middle-income trap, where previously rapidly growing economies slow down dramatically and never achieve the same standard of living as the technological leader. The reasons for this are unclear. It may be that policies appropriate for one stage of development are less effective at later stages and that the institutional structure lacks the agility to adjust as circumstances change.

In a recent paper, economists Barry Eichengreen, Donghyun Park and Kwanho Shin examined a large number of growth slowdowns over the past 50 years (declines in per capita GDP growth rates of at least 2 percentage points from rates of at least 3.5 percent per annum).

The economists looked for factors correlated with these declines.They found that the slowdowns tend to occur when per capita GDP reaches about $17,000 in 2005 PPP-adjusted dollars and when per capita GDP reaches about 58 percent of per capita GDP in the lead country. Maintenance of an undervalued exchange rate also appeared correlated with the slowdowns.

***

In 1820, China was responsible for about one-third of global GDP, while the U.S. accounted for just 1.8 percent. So, the likely shift in relative size in the next decade is in some ways simply a return to what we previously experienced. Even then, U.S. living standards were twice those of China. If China were to become the first country to completely close the gap with the U.S., it would mark a significant break with development patterns observed over the past half-century.

(source: "Will China Ever Become as Rich as the U.S.?" by Mark A. Wynne, Federal Reserve Bank of Dallas. Economic Letter—Insights from the Federal Reserve Bank of Dallas. Vol. 6, No. 6, June 2011)