China's Economic Transformation

Rating:
Summary: GDP Forecast
Review: Chow's prediction (p. 102-3 & 384) that around 2020 China's GDP will be equal to that of the US in PPP terms is based on statistics from a World Bank study. I undertook a study of my own based on figures from the UN Human Development Report.

Here I assume that China's growth rate will be an average of 7% per year until 2020, and America's to be 3.5% per year until 2020. The 7% rate is achievable for China, which managed to maintain more than that in the past two decades (about 8.2% per year from 1975-2001). 3.5% for the USA may be on the high side though (America's annual growth rate: 2.0%, 1975-2001).

Starting from $5.112 trillion in 2001, China will have ballooned to $19.0012 trillion in 2020 (almost 4 times).

In the same period America will have grown steadily from $9.9289 trillion in 2001 to $18.9778 trillion in 2020.

(In 2019, the year before 2020, America will still be some $410 billion larger than China. For those who are curious, by 2025 China's economy will be some $3 trillion larger than that of the US: $25 trillion versus $22 trillion. $3 trillion is a lot of money today - almost the size of Japan's economy - but this is likely to be worth much less in 2025.)

Chow's projection is thus about right. In 2020, China and the US are worth $19 trillion each.

Interestingly, my calculations show that China's economy, valued at $5 trillion in 2000, will be about $10 trillion in 2010, $14 trillion in 2015, then again almost $20 trillion by 2020, and over $25 trillion in 2025 - essentially quintupling over 25 years. (If growing at 10% annually China - or any other country - could expand its economy by a factor of 8 in just 21 years! I think that's what happened to America after 1865.)

The per capita income of an average Chinese should at least quadruple from 2000 to 2025, provided the population growth rate is kept tightly under control. That brings a standard of living on a par with South Korea or Bahamas today. Already China's population growth is among the slowest in the developing world, lower even than America's.

All these figures are in PPP, in constant 2001 dollars. In nominal GDP America will likely remain larger than China long after 2025 unless there are changes in the exchange rates for the dollar and for the Chinese yuan in the meantime, which is possible.

Chow's calculations are thus correct. I've crunched the numbers from a different source and both projections match.

Of course, nothing ever happens exactly as predicted, especially in economics. Linear projections can look foolish in retrospect. Even with the best statistics, every projection can be delayed - or accelerated - by man-made and natural disasters. But this book does give us an idea of China's economic future.

Whether or not China or the US will be the world's largest economy after 2025 will depend on many factors, one of which will be the size and integration of the European Union.

Rating:
Summary: GDP Forecast
Review: Chow's prediction (p. 102-3 & 384) that around 2020 China's GDP will be equal to that of the US in PPP terms is based on statistics from a World Bank study. I undertook a study of my own based on figures from the UN Human Development Report.

Here I assume that China's growth rate will be an average of 7% per year until 2020, and America's to be 3.5% per year until 2020. The 7% rate is achievable for China, which managed to maintain more than that in the past two decades (about 8.2% per year from 1975-2001). 3.5% for the USA may be on the high side though (America's annual growth rate: 2.0%, 1975-2001).

Starting from $5.112 trillion in 2001, China will have ballooned to $19.0012 trillion in 2020 (almost 4 times).

In the same period America will have grown steadily from $9.9289 trillion in 2001 to $18.9778 trillion in 2020.

(In 2019, the year before 2020, America will still be some $410 billion larger than China. For those who are curious, by 2025 China's economy will be some $3 trillion larger than that of the US: $25 trillion versus $22 trillion. $3 trillion is a lot of money today - almost the size of Japan's economy - but this is likely to be worth much less in 2025.)

Chow's projection is thus about right. In 2020, China and the US are worth $19 trillion each.

Interestingly, my calculations show that China's economy, valued at $5 trillion in 2000, will be about $10 trillion in 2010, $14 trillion in 2015, then again almost $20 trillion by 2020, and over $25 trillion in 2025 - essentially quintupling over 25 years. (If growing at 10% annually China - or any other country - could expand its economy by a factor of 8 in just 21 years! I think that's what happened to America after 1865.)

The per capita income of an average Chinese should at least quadruple from 2000 to 2025, provided the population growth rate is kept tightly under control. That brings a standard of living on a par with South Korea or Bahamas today. Already China's population growth is among the slowest in the developing world, lower even than America's.

All these figures are in PPP, in constant 2001 dollars. In nominal GDP America will likely remain larger than China long after 2025 unless there are changes in the exchange rates for the dollar and for the Chinese yuan in the meantime, which is possible.

Chow's calculations are thus correct. I've crunched the numbers from a different source and both projections match.

Of course, nothing ever happens exactly as predicted, especially in economics. Linear projections can look foolish in retrospect. Even with the best statistics, every projection can be delayed - or accelerated - by man-made and natural disasters. But this book does give us an idea of China's economic future.

Whether or not China or the US will be the world's largest economy after 2025 will depend on many factors, one of which will be the size and integration of the European Union.

Rating:
Summary: Update suggestions
Review: For the next edition - if there is one - I would like to see Professor Chow discuss at greater length two related issues: trade and currency.

Since the middle of 2003, China has become America's third largest trade partner (America is China's second largest partner), replacing Japan, according to the US Dept of Commerce.

The issue of the renminbi (yuan) is a hot potato in this election year, as many American politicians are clamoring for a "free-floating" of China's currency (as a solution to America's jobless problem, trade deficit, etc.).

Professor Chow needs to deal with this issue. I've heard counter-arguments from some real heavyweights: David Eldon, the Chairman of the global banking giant HSBC, and 2 Nobel Laureates in Economics - Robert Mundell, the world's #1 expert on international currency, and Joseph Stiglitz, the former Chief Economist of the World Bank and Chairman of the President's Council of Economic Advisers. All three point out that fooling around with the renminbi now would destroy the world economy without doing anything to solve America's problems. The editors of Fortune, Forbes, and Business Week agree: Be careful what you wish for, because you may get more than expected.

My guess is, Professor Chow will take these issues apart with the same analytical and keen intelligence he addresses other issues related to China's economic transformation.

Rating:
Summary: Update suggestions
Review: For the next edition - if there is one - I would like to see Professor Chow discuss at greater length two related issues: trade and currency.

Since the middle of 2003, China has become America's third largest trade partner (America is China's second largest partner), replacing Japan, according to the US Dept of Commerce.

The issue of the renminbi (yuan) is a hot potato in this election year, as many American politicians are clamoring for a "free-floating" of China's currency (as a solution to America's jobless problem, trade deficit, etc.).

Professor Chow needs to deal with this issue. I've heard counter-arguments from some real heavyweights: David Eldon, the Chairman of the global banking giant HSBC, and 2 Nobel Laureates in Economics - Robert Mundell, the world's #1 expert on international currency, and Joseph Stiglitz, the former Chief Economist of the World Bank and Chairman of the President's Council of Economic Advisers. All three point out that fooling around with the renminbi now would destroy the world economy without doing anything to solve America's problems. The editors of Fortune, Forbes, and Business Week agree: Be careful what you wish for, because you may get more than expected.

My guess is, Professor Chow will take these issues apart with the same analytical and keen intelligence he addresses other issues related to China's economic transformation.

Rating:
Summary: Comprehensive Review of China's Economy
Review: Professor Chow is a distinguished economist who is an elected member of the American Philosophical Society and the former chief of econometrics at Princeton University. His statements carry some weight. The key point of this book may be summarized in this sentence: "Hence the Chinese economy can be expected to generate about the same real GDP as the US economy in 1998 PPP terms in 2020." (p.103)

In other words, China will be an economic superpower rivalling America in 20 years' time.

Barring an unforeseen disaster - like an asteroid from outer space or World War III - Chow's prognostication may turn out right. What does that mean? Well, China will be resuming its former position as an economic superpower which it has occupied throughout history.

The most surprising and controversial part is Chow's contention that China's population is too small (chapter 11). He considers a number of factors in making this odd point, including arguments by Malthus and counter-arguments by Mao, as well as a number of intangibles (like the higher number of intellectual elites available from a larger population base). I think he goes wrong here, because he doesn't seem to have considered one serious fact: most of China is neither arable nor habitable - virtually useless - large though the country may be. What's more, the amount of usable land is getting less by the day, due to desertification from the north. China is bone dry.

Customers who are wondering whether this book is worth the price to invest in would do well to reflect on China's importance on the world stage. China is one-fifth of humanity and is exactly equal to America in territorial size. China has the world's third largest stockpile of nuclear warheads. (The Pentagon believes China's stockpile will quadruple in the next decades fully in line with its economic expansion.) China has a highly developed rocket and ballistic missile technology, and has publicly announced its intention to be the world's third nation to launch astronauts into space (to be realized in late 2003). China is one of the top ten oil producing countries, with larger proven crude oil reserves than America's (the largest in the Fast East - much larger than Indonesia's). China's relations with Muslim countries are excellent, and is probably the only major power to be popular among people of that faith. China has the veto on the Security Council. The WTO recently reported that China overtook Britain in 2002 as the world's fifth largest trader in goods and services, after the US, Japan, Germany and France. If the EU is counted as one unit, China is now the fourth largest trader. And according to the CIA World Factbook, China's economy is already the second largest in Purchasing Power Parity (the fifth largest in nominal GDP), and at $6 trillion it is 13% of the world's total.

Now Chow is telling us that China's rapid growth rate is an average of 7% per year for the next two decades, which is by far the fastest among the major powers (about twice India's, three times America's, and more than four-five times Europe's and Japan's).

In short, China is already a giant today (hardly the "modest" country as described by Bill Emmott of the Economist). People like Margaret Thatcher, Jack Welch and Paul Wolfowitz are already predicting China's rise to superpower status. And the economic transformation taking place there, fully and professionally detailed by Chow, will make it much bigger still. On top of all these, China today is also interesting because it is the oldest civilization among the major powers (America, China, Britain, Russia, Germany, Japan) and by far the biggest of the surviving ancient civilizations: Mesopotamia (Iraq), Egypt, Palestine, Persia (Iran), China, India.

Of course, China's per capita income will remain relatively low for the foreseeable future, but given the size of its population China will be a superpower long before it achieves American levels of income and standards of living - a prospect that is beyond the timeframe of this book.

Overall this book is excellent - serious and credible, without being excessively technical. It fills a big niche, and meets the needs of students, journalists, businessmen, Western observers and analysts alike. All of us should pay attention to the most significant event of the late 20th century and early 21st - the transformation of China's economy - and this book is an authoritative guide. It deserves 6 stars out of 5.

Rating:
Summary: Broad, Conventional Overview
Review: This book provides a good deal of moderately valuable information about the Chinese economy. It also has large sections of what seem like pieces of an ordinary introductory econ textbook, which will be tedious to anyone who has taken an econ course without being terribly valuable to those who haven't. The book appears fairly thorough and objective, but not very imaginative or insightful.
One point he makes that I found worth remembering is to point out the similarities between Chinese state ownership of enterprises with U.S. University ownership of companies created to commercialize their research. In both cases the owning institution has a mission very different from commerce, but often allows the enterprise to function as a business. Alas, he doesn't explore the incentive structures that make this often work in China but create monopoly-style inefficiencies when most other governments own businesses.