China: Eating our Lunch or Taking us to Dinner?

That’s the dilemna posed by the latest paper from Laurence Kotlikoff Hans Fehr and Sabine Jokisch: Will China Eat Our Lunch or Take Us to Dinner. Simulating the transition paths of economies in the U.S., EU, Japan, and China the paper develops a dynamic, life-cycle, general equilibrium model to study their interdependent demographic, fiscal, growth and current account evolution.

Having taken a close look at the respective population dynamics they point out that as a consequence of relatively high fertility and net immigration rates, the U.S. population is projected to increase from 275 million in 2000 to 442 million in 2100. In Europe – as we all already know – population may well fall over the next century from 375 to 340 million, while in Japan, the population falls from 126 million to 85 million. However the projections show the Chinese population decreasing by even more – from 1.3 billion to 1.2 billion. Although China is in fact aging rapidly, its saving behavior, growth rate, and fiscal policies are currently very different from those of developed countries. Kotlikoff et al find that if successive cohorts of Chinese continue to save like the current cohorts, if the Chinese government can restrain growth in expenditures, and if Chinese technology and education levels ultimately catch up with those of the West and Japan, the developed world’s long run future looks much brighter. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects.

In a recent article on declining yield differentials William Pesek (Hat Tip Brad Setser) asks “What’s China got to do with all this?”. Perhaps the paper by Kotlikoff et al offers him part of the answer. (I have more on this paper here).

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

3 thoughts on “China: Eating our Lunch or Taking us to Dinner?

  1. Why should we expect China, as it grows in influence, to be a ‘good actor’?

    It may decide to use more pressure to get its way on a broad range of issues, inclding Taiwan. And will any country be powerful enough to stop them?

    Jim Cramer, a well known US television stock market analyst, expects the worst from US dependence on China’s buying US debt.

    I do too.

  2. China will be reluctant to kill the relation it depends on. Except for vital interests. Vital in the eyes of China.

    So the US may have to sacrifice Taiwan.

  3. “China will be reluctant to kill the relation it depends on”

    The US too. That’s why I don’t expect a flight of capital from either China or the US any time soon.

    On Taiwan, funnily enough we have a guy from Taiwan staying with us right now, he’s sleeping peacefully as I write. I met him through a friend of mine from Beijing. They get on fine. So will China and Taiwan long term. I don’t see the issue here. Despite some heated rhetoric this is yesterday’s problem. All the Taiwan chip-plants have already moved to China :).

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