Sunday, November 29, 2009

Tyler Cowen on China and Transparency

This NY Times piece has some interesting ideas. Environmental scholars have wondered about the quality of the aggregate carbon dioxide statistics that China generates. Do we really know how many tons of carbon this big nation produces each year? In terms of data quality, is this the tip of the iceberg? Tyler sketches some ugly possible future scenarios concerning China's economic dynamics

After spending two weeks in Beijing in September 2009, I can offer a few observations.

1. China's leading universities are producing 100,000s of talented ambitious young graduates. Now that the young faculty have been trained at Western Universities, this new cohort is getting a serious education. (I cannot judge the quality of the education in the 1980s in China's universities). This huge stock of human capital will allow the "Google Chinas" and other human capital based enterprises to boom.

2. The huge home market --- will act as a commitment device for selling to domestic consumers. Even upper-middle class people in Beijing do not have the standard of living of graduate students in Boston. The Beijing elite live in small apartments with some durables and many without cars. Car ownership is 18% in Beijing as of 2006. My point is that there is a heck of a lot stuff that can be sold to the current urbanites in China and the hundreds of millions of rural people who will soon move to the cities.

3. The government appears to be "pro-growth" --- it is ironic that a communist party government appears to harness public goods investments to achieve greater growth targets than the mighty USA. Counter, to this claim --- it appears that China's marginal taxes are quite high. Even upper-middle class people in Beijing have little disposable income. Arthur Laffer needs to go to China.

So, my bottom line is that 8% growth will continue. Now Tyler might ask me; how do you "know" that their economy is growing at 8% a year? Now there is an objective reality that can be counted. Count new car registrations; count electricity consumption; look at the budget share on food (following the work of Hamilton and Costa; is this budget share falling over time? If so , then this is a clear sign of a growing standard of living.

If you want to read my wife's paper on this topic then read this 2001 JPE paper.

Note that at the end of the Cowen piece he makes some general equilibrium claims.
If China redirects its capital investments inward, how much will U.S interest rates
rise by? If we have a decent macroeconomic model, it should provide such a prediction. Is China "small" in the world capital market? If not, how "big" is it? If China ducks out, will the rest of the world demand a larger risk premium for lending to us?