Will Chinese living standards ever surpass those in the USA?

Possibly the single most important of the tensions stoked up by President Trump is the rivalry between the United States and China. Economic strength will be the ultimate determinant of this struggle for the position of Top Nation.

Comparisons of the size of economies, particularly ones at very different levels of income per head, are fraught with difficulties. Taking a deep breath, annual output in China is currently around $10 trillion a year, compared to the $17 trillion in America.

Over the past 30 years, the US grown at an annual average rate, after allowing for inflation, of 2.4 per cent, and China by 9.3 per cent. If we project these rates forward, the Chinese economy will be as big as the American by 2024. By 2037, it will be more than twice the size.

We can allow for some slow down in China’s growth, to say 7 per cent a year, and a bit faster expansion in the US, to take account of the fact that the average over recent decades is influenced by the impact of the financial crisis. Even so, we soon reach a situation where the two are of comparable size.

But a paper in the latest issue of the world-class Journal of Economic Perspectives argues persuasively that the sustainable Chinese growth rate in the medium and longer term is much lower, in the range of 3-4 per cent a year.

Hongbin Li and colleagues, based both in Stanford and top universities in China, note that growth in China since the start of the economic reforms in 1978 has been the fastest that any large country has sustained for such a long period of time. But much of this is due to the rapid transition from a centrally planned to a market oriented economy. Forty years ago, virtually no-one operated in the private sector. Now, well over 80 per cent of workers are in the private sector. This shift obviously cannot be repeated.

Closely intermingled with this has been the massive move of population from the countryside to the cities. More precisely, from low productivity agriculture to higher productivity urban economic activities. But the annual growth rate of rural-to-urban migration has declined from over 11 percent in the 15 years before 2000 to only 3 percent since then. And the growth of migration almost certainly will fall further given that rural-based surveys are finding that less than 10 percent of young able-bodied rural individuals are now living (and working on farms) in rural areas.

Until 2011, the authors point out that China enjoyed what they call a “demographic dividend”. The age group of the working population was unusually high as a share of the population as a whole. But because of what the authors tactfully refer to as “the fall in fertility” since the early 1980s, this is now declining fast. The one child policy was mainly responsible, but higher incomes also reduce birth rates.

China remains a huge and growing economy. But projections that it will overtake the US within readers’ lifetimes seem fanciful.