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March 21, 2008

China and Taiwan

Angus Maddison provides an update view of China's Economic Future in the "Chinese Economic Performance in the Long Run" tome written for the OECD.

Angus Maddison now predicts: China should overtake the United States as the world’s biggest economy before 2015 [PPP] and by 2030 account for about a quarter of world GDP. [This is faster than his 1998 predictions] It would have a per capita income like that of western Europe in 1990. Its per capita income would be only one third of that in the United States, but its role in the world economy and its geopolitical leverage would certainly be much greater.

I had projected China to pass the US economy on an exchange rate basis by 2020 but updated that to 2018 plus or minus three years.

Taiwan's election - likely good for Taiwan and China's future economies
Taiwan's presidential election starts tonight. I have predicted for many months that I think Ma Ying-jeou will win.

The Wall street journal talks about the developments up to this point and the prospects for Taiwan-China relations.

Taiwan investment in China had been falling for the last 6 years, that trend should be reversed when a new president is installed. More strongly with Ma but even with Hsieh.

Frank Hsieh, says Tibet shows the need for a strong ruler who can defend Taiwan's interests. But he advocates ending the travel ban and lifting the 40% rule. Though the party still officially seeks independence, Mr. Hsieh says his priority is better relations.

The more likely victor, according to polls, is Ma Ying-jeou of the Nationalist Party, who wants to go further. Despite his party's historical hostility toward the Communists, who defeated the Nationalists in China's civil war nearly 60 years ago, Mr. Ma now is floating the idea of a common market.

In final pre-election polls taken March 8 -- before the violence in Tibet and Mr. Hsieh's warnings -- Mr. Ma led by about 10 percentage points


Bloomberg news talks about the thaw in Chinese and Taiwanese relations that will unfold over the next few years.

Reuters talks about how the Taiwanese election will be good for Taiwan's economy

The International Herald Tribune talks about the likely better relations that will result.

Marketwatch talks about the expected improved economic climate.

Peter Sutton, analyst with CLSA Asia-Pacific Market, said the country's [Taiwan's] "attractiveness increases in proportion to the expansion of its links with China."


Asia Times online has more personal stories on this issue.

Back to details of China's future growth
The Policy problems of China's rapid growth are changing. Ten years ago the problems were reducing the role of inefficient state enterprise, weakness of the financial system, and the weak fiscal position of central government. However, those problems have been greatly reduced in the last ten years.

The problem of energy supply and the environment has emerged as a significant new challenge to China’s future development. Electricity supply rose ten–fold between 1978 and 2005 and its availability at rather low prices transformed living conditions in many urban households. Car ownership has also risen and is likely to become the most dynamic element in private consumption. In 2006 there were about 19 million passenger cars in circulation, (one for every 70 persons). This compared with 140 million and one for every 2 persons in the United States. Judging by the average west European relationship of car ownership to per capita income, it seems likely there will be 300 million passenger cars in China (one for every 5 persons) in 2030.

There has been a surprisingly large improvement in the efficiency with which energy is used. In 1973, 0.64 tons of oil equivalent were used per thousand dollars of GDP, by 2003, this had fallen to 0.22 tons. The International Energy Agency (IEA) projects a further fall to 0.11 tons in 2030 in a scenario which takes account of energy efficiency policies the government can reasonably be expected to adopt. Energy efficiency was better in China than in the United States in 2003 and the IEA expects this to be true in 2030.


Other problems:
- Legal System and Private Property Rights
- Regional and Urban Rural Inequality

Angus Maddison's updated detail view of the China catchup process:
China is still a relatively poor country. In 2003 its per capita income was only 17 per cent of that in the United States, 23 per cent of that in Japan, 28 per cent of that in Taiwan and 31 per cent of that in Korea. Countries in this situation of relative backwardness and distance from the technological frontier have a capacity for fast growth if they mobilise and allocate physical and human capital effectively, adapt foreign technology to their factor proportions and utilise the opportunities for specialisation which come from integration into the world economy. China demonstrated a capacity to do this in the reform period and there is no good reason to suppose that this capacity will evaporate.

It is likely that the catch-up process will continue in the next quarter century, but it would be unrealistic to assume that the future growth trajectory will be as fast as in 1978-2003. In that period there were large, once-for-all, gains in efficiency of resource allocation in agriculture, an explosive expansion of foreign trade and accelerated absorption of foreign technology through large-scale foreign direct investment. The pace of Chinese progress will slacken as it gets nearer to the technological frontier. I have assumed that per capita income will grow at an average rate of 4.5 per cent a year between 2003 and 2030, but that the rate of advance will taper off over the period. Specifically, I assume a rate of 5.6 per cent a year to 2010, 4.6 per cent between 2010 and 2020 and a little more than 3.6 per cent a year from 2020 to 2030. By then, in our scenario, it will have reached the same per capita level as western Europe and Japan around 1990, when their catch-up process had ceased.


FURTHER READING
Other OECD papers and studies related to the rise of China

Ma plans to allow more Chinese tourists into Taiwan, which may boost visitor arrivals to 3.6 million in 2009, up from last year's 270,000. [13 times more]

Direct air links ``will start another hotel building boom,'' said Douglas Hsu, chairman of Taiwan's Far Eastern Group, which has textile, shipping, banking and retail businesses. ``All of these visitors have to stay somewhere, and all of them will have to shop.''

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