China ?

China's nominal per-capita GDP stands close to $4500. This is about a third of the way towards a developmental milestone INSEAD economists Antonio Fatas and Ilian Mihov have dubbed "The Great Wall." Fatas and Mihov have given this name to attaining over $15,000 in per-capita GDP because over the past thirty years middle income countries have consistently failed at climbing over it into the ranks of advanced nations.

In a recent Wall Street Journal article, entitled, "Is Mexico China's Future," Bob Davis also talks of the difficulty emerging countries have in reaching developed status and notes that "Singapore and South Korea are nearly alone in having made the transition." Nearly everyone else gets stuck in a sort of Mexican purgatory where continued growth is dependent on continued reform of governmental and financial institutions: Most every other poor nation — whether one calls them “third world,” “developing” or “emerging” — gets stuck in second-tier, Mexican-style status. “Absent continuing reforms,” the economists argue, “Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico’s” — an outcome that would be a hard slap to the China-as-future crowd.

While Mexico and China seem very different, the economists point out a number of similarities. On the positive side, the two nations focused on foreign trade as a growth engine and they eased central government control of the economy. On the negative side, their financial systems are inefficient, their non-tradable industries (communications, transportation and the like) lack competition; and their rigid labor rules discourage employers from adding full-time workers. The thinking on this is that it is relatively easy for developing nations to make big yearly moves in their per-capita, but only up to a certain, Mexico-like point. After that, top tier governing and financial reform becomes necessary to become Denmark-like:

Once that catch-up period is over, however, the countries need to continue to reform institutions and policies to produce a well-functioning government an efficient financial system and a steady increase in knowledge so it can continue to grow smartly. Few countries manage that transition, which leaves them well behind the U.S. and Europe. In its post, "China’s $10,000-12,000 Question, the China Bystander blog (a superb blog, by the way) posits that China will not reach developed status without some serious changes:

“There is not a single country that has good quality institutions and is poor,” Mihov said in Singapore. “The gap between rich and poor is driven by poor productivity that is linked to poor quality institutions and poor business environment.” As evidence he offers the contrasting experiences of Singapore and Venezuela. Even more dramatically, consider the economies of the old Soviet bloc, which collapsed as per capita incomes hit and then got stuck at the $12,000 a year level (adjusted for current prices).

China Bystander himself adds that poor quality in China is linked to set of very specific problems and that China's ability to get past The Great Wall will depend on its ability not only to reform, but to reform quickly enough: China’s annual per capital income is $4,000. At current growth rates that gives it less than a decade before it starts bearing down in earnest on that tipping point or The Great Wall as Mihov inevitably dubs it. China By stander sees SOEs as another potential impediment: The growing economic and political clout of state-owned enterprises is another possible impediment to progress. Like Japan before it, China has grown fast by replicating and improving on what advanced economies have already done and producing and selling the results much more cheaply. Yet, as Japan found out, there comes a point where innovation has to replace imitation if growth is to be sustained.

China’s state-owned national champions and aspiring multinationals are ambitious, adaptive and fast learners (as were Japan’s). They are developing R&D and product development capabilities but they remain reliant on access to low-cost capital from the state, have rudimentary organizational and financial management skills by the standards of multinationals and have yet to acquire two of the most essential traits of a globalized multinational, managing diversity and allowing the intrapreneurship in which innovation can flourish (traits that few Japanese multinationals were able to acquire). Beijing is throwing a wall of money and of engineers and scientists at making its national champions more innovative (dealing with diversity isn’t even on the radar). Yet in the process of building up the SOEs it is distorting markets and entrenching vested interests that increase the resistance to reform. It also crowds out small and medium sized companies where growth-generating innovation truly flourishes.

China Bystander also thinks China's demographics bode ill for it climbing over the Wall:China has already reaped the benefits of a demographic dividend, which is believed to have played a role in the country's economic breakthrough, having enjoyed the advantage of abundant cheap labor for decades. "Wage increases are the most direct response to labor shortages. That will definitely squeeze the profit margin for some low value-added manufacturers," Zhang said.

What will China do and what will China's economic future be? I have heard many say they think the Chinese government will be fine with the $12,000-$15,000 wall, preferring to stop there than to reform "too much." i personally think it is too early to judge. I mean, who knew Korea and Singapore would keep growing while Malaysia, Indonesia, and Thailand would fail to keep pace? What is the difference between Korea and Singapore and Chile (whose economy has done amazingly well over the last ten years) on the one hand, and Malaysia, Indonesia, Mexico and Thailand on the other? And if you answer better governance, then you have to explain why Singapore and Korea got it and the other three did not? Same if your answer focuses on corruption. So really, which way will China go? Korea/Singapore or Malaysia/Thailand/Mexico? . What do you think will happen? Will China climb over the wall, merely bang against it or never get close? Why?