Why China Won’t Rule the World Anytime Soon

Economist Daniel Altman predicts that “deep factors,” including endemic corruption and a Confucian business culture, will limit China’s growth, causing it to surrender the top spot shortly after becoming the world’s biggest economy.

What’s the Big Idea? 

Americans are optimistic by nature, but after three years of recession many have accepted the narrative – axiomatic elsewhere in the world – that our economic empire is in decline and China’s reign about to begin.

The story isn’t that simple, says Daniel Altman, author of Outrageous Fortunes: The Twelve Surprising Trends that Will Reshape the Global Economy. In a chapter titled “China will get richer, and then it will get poorer again” Altman writes that China’s rapid rural-to-urban migration is driving its meteoric growth, following a pattern familiar from the recent history of Korea and Japan. The increased concentration of workers in the cities boosts manufacturing while making it possible to agglomerate farms and mechanize agriculture. Also, like Japan and Korea before her, China has become adept at copying foreign products cheaply and exporting them worldwide.

But cheap goods and rapid migration are limited drivers of growth, said Altman in a recent Big Think interview:

Daniel Altman: You can only have so many people moving into the cities.  You have to leave a few out in the countryside. And eventually, as you’re producing all of these electronics and other goods, cars, et cetera for export, the prices are going to start to go up as the quality gets better. Wages will go up, too. Pretty soon you’re competing directly with the most advanced economies in the world.  That is what happened to Japan.  That is what is happening to Korea right now.

At this point, says Altman, the most significant determinants of long-term growth are the ‘deep’ cultural and infrastructural factors that facilitate or limit innovation and entrepreneurship. 

Daniel Altman: When economists look at how countries grow in the long, long term – over the course of decades and centuries – they find that it’s not just driven by idiosyncratic events. It’s not just driven by how many people they have. It’s driven by a lot of deep factors, which are present in those economies all through those periods, including things like climate, geography, what kind of business culture you have, how hierarchical your companies are, what protections you have for investors, what property rights are like, and what the deep foundations of your legal system are.  

These are the factors that really help to determine the limits of growth in the long term and what kind of living standards your people can really attain. And the reason is quite simple. They all have to do with how much you can bring people, ideas and capital into your country and transform them into businesses and innovations. These things are the things that make economies grow, and some countries are a lot better at fostering them than others. 

China’s “deep factor” limitations, says Altman, include the ease of doing business (the country ranks 79th, below countries including Zambia and Belarus, in the World Bank’s most recent report), the nation’s rampant corruption, and a Confucian business culture that is extremely hierarchical and resistant to innovation from below. 

What’s the Significance? 

These factors, Altman predicts, will slow China’s growth several decades from now, soon after its economy surpasses that of the United States, and as its major growth drivers begin to run out of steam. This in spite of the obvious objection that China’s human resources – its massive population – far exceed those of Japan and Korea. 

Daniel Altman:But there are a lot of people who say, “Hey, China is enormous. It’s a population of over a billion people. How could it not become and stay the biggest economy in the world?”  Well, Chinese incomes are a lot lower than American incomes right now.  Even if they were to rise to the level of Korean incomes right now it would still be a pretty close match between the US and China for which was the biggest economy in the world.

And we know that incomes don’t have to grow forever.  We have seen countries like Russia where incomes and populations as well start to stagnate. As a result of that we can’t assume that China will automatically continue to grow and grow.  These deep factors that I have been talking about like the legal system and the business culture will actually be important when it comes time to compete head to head with the biggest economies in the world.  

While the United States has significant advantages in these areas, Altman argues, we are not alone among nations in supporting innovation and entrepreneurship. And the current economic crisis, coupled with the attractive compensation packages offered by businesses in rapid-growth economies, has begun to result in reverse brain-drain to India, China, and elsewhere.

Where the U.S. has a long-term competitive advantage, says Altman, is in its unique ability to sell the rags-to-riches dream worldwide. This, he believes, will position us as the world’s future sales force – its messaging machine – as the global economy continues to integrate. But that opportunity depends, he says, on the U.S. keeping the dream alive by fostering a truly meritocratic economy. 

Suddenly that undergrad major in Communications is starting to look a lot more useful . . .