Tuesday, October 23, 2007

Bryan Caplan's Strange Questioning of China's Boom

Bryan Caplan here questions Chinese economic statistics showing rapid economic growth.

Now, it is certainly justified to show a healthy dose of skepticism toward government statistics, and Chinese government statistics is probable not more reliable than most other countries. However, in the case of China there is stronger reason to believe that official statistics underestimate growth than overestimate it, given China's prominence in international trade and given the fact that it is the biggest or second biggest consumer of almost all commodities in the world. And Caplan's arguments are of really low quality.

His first argument is that a too high proportion of the population is in agriculture and that the productivity gap between farmers and the rest is suspiciously high. Actually, first of all, the 60% number refers to rural population, not farmers, which is not the same as some in the rural population works in small scale manufacturing and services. And secondly, as the productivity of workers in industry and services is confirmed by China's high level of foreign trade and commodity consumption, if the real productivity gap is smaller than the official that would imply higher farm productivity rather than lower nonfarm productivity.

His second argument, that savings are too high for a growing economy is even worse. Savings and the investments it enables is what drives economic growth by not only providing demand but also increasing production capacity. Consumption on the other hand is simply demand and does not increasing supply. So it is certainly nothing strange about a high savings rate being associated with high growth, it would be by contrast be strange and suspicious if you find a country with high growth and a low savings rate.


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