SMAUGGY WEATHER:

Don't Overestimate the Dragon's Power (Desmond Lachman, January 4, 2006, Australian Financial Review )

Among the more enduring features of the global economic landscape over the past 15 years has been America's remarkable productivity performance. While Japan has been mired in its post-bubble deflation and an inflexible Europe has virtually stagnated, US economic growth has consistently outstripped that of its major industrialized competitors. And, despite all the ballyhoo about increased global competition and underlying US economic imbalances, the US productivity miracle shows little sign of abating.

The most recent Federal Reserve estimates suggest that the US productivity machine is humming and that US economic potential growth is likely to be about 3 per cent for the foreseeable future. This would be not only a triumph for free-market economics but would place the US economy in a class of its own among the world's more mature economies.

Yet a dangerous myth is stalking international financial capitals. It is the idea that China has finally awoken and that the 21st century is going to belong to Asia.

This myth overlooks China's fundamental political weaknesses. It also turns a blind eye to China's economic clay feet and its many economic vulnerabilities. As such, it unnecessarily stokes American fears about the rising Chinese dragon and runs the danger of spawning protectionist pressures, which could undermine the global trading system. [...]

While there are many and very real short-term risks to the Chinese economic miracle, the more fundamental reason why the US need not fear a long-run economic challenge from China lies in the disparate productivity performance between the two economies. China's recent rapid growth has not been the product of technological innovation or productivity increases of the sort that is now taken for granted in the US. Rather, it has been the product of investing an inordinate proportion of its income and of bringing part of its rural labor surplus into the market economy.

China won't officially have jumped the shark until Michael Crichton writes a hysterical thriller about it or a Democrat runs for president saying we need to adopt their system.

Posted by Orrin Judd at January 4, 2006 3:11 PM