China’s GDP per capita continues to lag developed countries despite years of strong growth.
Dr. Bill Conerly using data from International Monetary Fund
China has enjoyed phenomenal super-charged growth in recent decades, but that pace will very likely slow down. Arnold Kling compiles and comments on several perspectives about the country’s prospects. Reasonable economic growth theory tells us that China’s growth rate will slow but remain above that of developed countries. Xi Jinping’s policies will limit future growth, but the country’s potential is so much higher than current activity that we shouldn’t be too pessimistic.
China’s per capita income, translated into U.S. dollars, was just 2.5% of the average of the G-7 countries back in 1980. Although China’s growth rate has slowed in recent years, so has the G-7’s. China has plenty room to grow before it catches up to the advanced economies, but it will most likely remain less developed in the years to come. (Data come from the International Monetary Fund’s World Economic Outlook Database.)
An Economic Growth Framework
A country’s total economic output is the product of its labor force times its productivity (output per worker). The average standard of living is simply output per person, and thus driven by worker productivity, with a relatively small adjustment for how many of its population are working.
In an advanced economy such as the United States, economic growth is driven by technological change. Technology should be taken broadly, meaning not only scientific and engineering innovations but also business method improvements (such as Walmart’s inventory management).
A less developed economy, such as China, can grow more rapidly than an advanced economy, in what economists call “catch-up growth.” The country does not need to develop new technology; it can take large strides by copying well-proven technology from the developed countries.
However, an economy is constrained by its policies and institutions. Economic activity will be greatest when decisions are made by people without constraints aside from property rights. But the people in most democracies and the rulers in most non-democracies have other goals. The distribution of income and social safety nets, for example, can be goals that lead to policies which limit economic activity. Whether they are good or bad policies goes beyond economics into philosophy, ethics and the values of the people making judgments.
Government policies that interfere with private decisions affect potential economic activity. This leads to a view that for most countries, potential economic activity is some fraction of the top country’s actual activity. How much of that potential is achieved depends on the country’s policies and institutions. German’s GDP per capita is 83% of the U.S. level, while Italy’s is 71%. Governance is not the only reason for the difference, but it’s a large one.
The United States leads the larger economies in GDP per capita. (Some small countries such as Lichtenstein and Monaco do very well in the rankings.) Though U.S. policies and institutions do not completely maximize economic output, we do better than the other large countries.
European Economic Growth
European countries generally enjoy high-income, but mostly behind the U.S. both in current level and recent growth rates. The reason for European under-performance is that high priority has gone to protecting old ways instead of accepting new ways.
Mario Draghi’s report cited this fact: “Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.” He cited this key issue: “… innovative companies that want to scale up in Europe are hindered at every stage by inconsistent and restrictive regulations.”
A recent study found that “restructuring costs (that include much more than severance packages) are approximately 10 times higher in countries with high labor protection, such as in Western Europe, than in countries with low labor protection such as in the United States.” When a company must pay a great deal to fire an employee, it will hesitate to hire in the first place.
The list of largest corporations tells an interesting story. The European Union’s ten largest companies (ranked by market capitalization) include three luxury consumer goods companies: LVMH, Hermes and L’Oreal. In the U.S. market, eight of the top ten are technology innovators, one (Walmart) is a business method innovator, and the other is Berkshire Hathaway. No fancy handbags in the group.
China’s Economic Growth
China’s growth illustrates catch-up growth. The country was once richer than Europe, but that was from roughly 1000 to 1700 CE. In the 20th century, China was devastated by civil wars, Japanese occupation, and then very bad policies which led to low productivity and widespread famine. In the late 1970s, under Deng Xioping, policies improved as the government allowed communal farms to divide up land into individual plots and then tolerated small business, later courting foreign investment.
The question for China looking forward is how much further can productivity grow under current government policies. China certainly is not trying to maximize economic output. The chief priority seems to be maintaining power in the hands of the Chinese Communist Party. And President Xi Jinping believes that top-down directives from political rulers can allocate resources better than the bottom-up competitive process, a belief contradicted by every instance of central planning.
Looking forward, China’s GDP per capita is under one-third the U.S. level. Even with poor governance, it may very well be able to grow faster than the United States and G7 countries. People in poor-productivity sectors, such as rural farming, can continue moving into cities where higher-productivity work is available. Manual processes in manufacturing, agriculture and construction can be improved with still fairly simple tools. However, building more useless stuff—such as “ghost cities” with empty apartments—helps their economic statistics without improving the quality of life. Valuing a project at cost of production rather than value in an arm’s length sale—common in all economic statistics—especially mars Chinese data.
Many critiques of China’s economy note the bad policies but fail to ask, “How bad is it?” China is so far behind the developed world now that more catch-up growth is possible.
Business Implications Of China’s Economic Growth
A large bet on Chinese economic growth would be speculative at this point. But business decisions that require only modest economic growth should bear fruit. In other words, company leaders should look at particular opportunities rather than painting the country with a broad brush. When sales or purchases can be made with the likelihood of a solid profit margin, then don’t be afraid of China. But an investment that only pays off with rapid economic growth is for people comfortable with wagering large amounts on a roulette wheel—betting on the red, of course.
Source: https://www.forbes.com/sites/billconerly/2025/08/21/chinas-and-europes-economic-growth-potential-vs-policy-limitations/
