Beijing's exceptionalism.

• Author: Anderson, Jonathan
• Position: The Color of China

Is China's rise inevitable? Well, as we've learned to our great chagrin over the past twelve months, there's nothing inevitable about continued rapid economic expansion or the near-term success of any economic model, and past performance is most emphatically not a guarantee of future returns. And, as with any lower-income developing country, there are plenty of visible and unforeseen pitfalls that could hurt Chinas growth prospects over the coming years and decades.

However, as author and newspaperman Damon Runyon famously remarked, "The race is not always to the swift nor the battle to the strong--but that's the way to bet." And when taking odds on the potential of today's emerging markets to mature into wealthier and more powerful states, you had best be betting on China.

The mainland is already getting there faster than any major economy before it. And, the risks of an outright economic derailing over the next ten to twenty years are much lower than commonly believed.

In a debate often dominated by conjecture and assertion it helps to focus on hard data, and at the macroeconomic level, here are the hardest numbers we have: in the three decades between 1978 and 2007 the official Chinese GDP grew at an average real pace of 9.9 percent. Of course, the quality of historical growth figures has generated an intense academic debate, and many researchers conclude that real growth has been overstated for a variety of reasons (such as under-measurement of inflation and other distortions in the traditional socialist statistical system); however, even the most skeptical analysts still come out with numbers of 9 percent year over year (y/y) or above for the postreform era.

How does an average growth rate of 9 or 9.9 percent compare with other major historical cases? As it turns out, whether we take the top or the bottom end of the range, China is a world-record holder. Over its peak thirty-year growth period Japan grew "only" at an aver age real rate of nearly 8 percent, and between 1960 and 1995 the high-growth Asian "tigers" expanded at paces of 7.8 percent in Hong Kong, 8.3 percent in South Korea, 8.4 percent in Singapore and 8.9 percent (the previous record) in Taiwan. This is not all; with the sharp slowdown in mainland birthrates since the 1970s, Chinas outperformance in terms of per capita income growth is higher still.

The next set of figures concerns the sources of that growth. Remember from first-year economics that in the most basic formulation there are three ways for countries to grow: (i) by adding more labor, (ii) by adding more capital, and (iii) by combining capital and labor in better and more productive ways. The latter is so-called "total factor productivity" (TFP) growth, and is in many ways the best single measure of long-term economic success because it gauges the "quality" rather than just the quantity of growth. (1) Here, as well, researchers have carried out detailed studies of Chinas growth composition. Estimates of historical-factor-productivity growth tend to run from 2 percent y/y to 4 percent y/y, with the broad bulk centered around 3 percent. That is, as best we can measure, just under one-third of Chinas growth is coming from rising productivity.

How does this compare with other parts of the world? Once again China posted a record performance. For much of the postwar era, the industrialized West saw annual TFP growth rates of up to 2 percent; the average for Japan and other high-growth Asian countries was around 2.5 percent--with no other region coming even close to these numbers. So productivity growth of 3 percent or thereabouts puts the mainland economy at the very high end of global experience.

And this brings us to our final set of hard numbers. In 1990, average Chinese national income in prevailing U.S.-dollar terms was $350 per head. By 2000, that figure had risen threefold to $1,000 per head, and, as of the end of 2008, per capita income had tripled again to $3,000. If China continues to grow at 8 percent y/y or above in real terms for the next two decades, then in present-dollar terms, per capita income could easily reach $8,500 by 2020 and $20,000 by 2030. This puts average mainland incomes above where Taiwan and Korea are now--i.e., solidly middle class and eligible for OECD membership--and also puts the total size of the Chinese economy above the combined level of the United States and the European Union today.

Let me summarize here for emphasis: in strict macroeconomic terms, so far China is unambiguously the most successful emerging economy of the postwar era. And at the current pace of development, Chinas "rise" is not some hazy prospect shimmering on the distant horizon, but a concrete reality only twenty years down the road. Most important of all, as laid out above, the mainland doesn't need to grow at a breakneck pace of 10 percent per year to attain developed-country status by 2030; 8 percent will do nicely, and even if trend growth drops to 6 percent or 7 percent, this simply pushes back the arrival date by a few years.

In other words, if you want to argue for Chinas failure, it's not enough to say that the economy will slow. Instead, you need a massive disturbance or outright crisis that derails growth for a long, long spell--and you need it fairly soon.

In today's public debate there are plenty of potential hazards to point to, including bubbles bursting, global depression, social tensions, loss-making state enterprises, an inefficient socialist model and the lack of political freedom. And as I stated at the outset, there's no guarantee whatsoever that one or more of these elements won't suddenly overwhelm China's growth prospects and drag the economy down. However, an objective look at risk factors shows that they are moderate, with little to suggest that the economy faces a looming crisis anytime soon. With apologies for the brevity imposed by space constraints, let me at least give a broad outline of the main arguments here.

First up is perhaps the most obvious and pressing concern, which is China's fate in the current global recession. Export volume contracted outright in the fourth quarter of 2008, and the turnaround in local stock and property markets has sent domestic construction and industrial spending down sharply as well. With the prospect of much-slower growth and rising unemployment this year, it's natural to wonder if this is the shock that could send the mainland over the edge.

However, by any measure China is one of the least export-exposed economies in the Asian region; only around 8 percent of the mainland workforce is employed in export industries, and light-export manufacturing, such as toys, textiles and electronics processing, accounts for a smaller share still of total Chinese investment spending. Even at the very peak of the recent trade expansion, net exports drove no more than one-sixth of overall GDP growth. This helps explain why China was able to keep right on growing during previous sharp export recessions, such as the global IT bust in 2001-02, and why it will take much more than falling exports to seriously impair medium-term-growth prospects today.

Turning to the domestic economy, China's local stock market shot up nearly sixfold between 2005 and...