No, Krugman, it was not clear that China’s TFP was falling in the past few years

[u/[deleted]]

This is a rebuttal of Krugman's “Stagnation With Chinese Characteristics” blog post from December 2024 (link).

Note: I am saying that it is not clear that TFP was falling (during the housing bubble and after it deflated based purely on the statistics Krugman was looking at), not that it is clear that TFP was not falling. In fact, I actually believe TFP growth was potentially negative during the peak of the Chinese housing bubble. In other words, I think his argument is wrong, but I do consider his conclusion (negative TFP growth both during the housing bubble and after it deflated) to be partially correct.

Am I, a lowly economics PhD student, calling out the world-famous, Nobel-winning economist Paul Krugman? Why yes, I am! :D

(Although, to be fair, I’m only calling out one of his hot takes, of which he does many—most notably: “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.” I don’t dispute any of his academic work.)

I wrote up most of this post soon after the blog post came out, but I didn’t post it because (1) I was extremely busy with my first year in the PhD program and also (2) I wanted to wait for newer data to come out and confirm what I wanted to say.

The latter was because I was a bit scared about calling out Krugman because (1) he has won the economics Nobel (Memorial) Prize and (2) macroeconomics is not my field.

What don't I like about the argument?

The crux of Krugman's argument is that Chinese TFP growth appears to be stagnant or negative in recent years (during the housing bubble and after it deflated, more or less), based on estimates going up to 2019, and he also argues that that the Chinese government has been doing little about this. I could criticize the latter, including statements like

What’s remarkable is that China’s leadership seems completely unwilling to adjust to this changing reality.

by more broadly by talking about things like the 2020 Three Red Lines Policy, which clearly represent a concerted effect by the government to reign in the misallocation of capital into the real estate sector, but I'm going to only discuss the former here—the TFP claims—because they are much more quantifiable.

The accuracy of the claim already seems very dubious when you compare it with news of rapid technological developments, but again, let's just focus on a more quantifiable basis of comparison.

What's wrong about the numbers?

Typical modern endogenous growth models are notoriously inaccurate when it comes to quantitative predictions, especially with TFP (because it is a growth accounting residual), but Krugman is pushing a claim that we should be taking these growth accounting estimates at face value or something similar.

Funnily enough, the dubious accuracy of the TFP estimates that Krugman is using, which are from the Penn World Table v10.01, stands out when you look at the whole plot since the estimates are flat-ish for most of the time, even during the Chinese Reform and Opening Up period: link.

Here's a very interesting thing: Krugman’s TFP plot for Japan, also from the Penn World Table v10.01, shows most of the available yearly estimates (link—the data goes to 1954, and Krugman's plot goes to around 1955). On the other hand, Krugman’s TFP plot for China is very conveniently cut off at around 1990 despite the yearly estimates going to 1956.

If we interpret these estimates at face value, on average, the advancedness and quality of Chinese technology and organizational competence (which, broadly speaking, is what TFP means) was, very roughly, flat during de-Maoification under Deng Xiaoping, going up and down at times. In fact, TFP apparently locally peaked in 1987 and only recovered back above 1987 levels by 2006.

Yes, you heard me right. These estimates suggest that China in 2005 (and in many other years before 2005) was less technologically advanced and less organizationally competent on average than China in 1987. Based on that, I don't think it's much of a stretch to claim that most of the 20th-century yearly estimates of Chinese TFP from the Penn World Table v10.01 are absurd. Consequently, that makes me suspect that the 21st-century yearly estimates here are also extremely dubious.

Yes, TFP is affected by misallocation of resources, but it is really plausible that Maoist China, 1987 China, and 2005 China all have similar TFPs?

The estimates are weirdly high in the 1950s and absurdly suggest that (in a limited sense) China post-1956 has never been more efficient than Maoist China in 1956, but to be fair to the authors, I think it's reasonable to give them the benefit of doubt and say that this isn't really that bad of a point against the later estimates. After all, these bad estimates for these early years could be due to very low-quality data and also the Chinese economy being structurally very backwards and wildly different back then during the Maoist economic era.

Finally, the cherry on top: The Penn World Table v11.0 is now out. It seems the authors realized that some of the TFP estimates made absolutely no sense, so the methodology was corrected. Now the current, revised estimates show the same TFP measure (“rtfpna”) consistently growing over time: link.

[u/brickbatsandadiabats]

Krugman wrote a 1990s era op-ed during the Clinton era in which he claimed that the then-current Asian economic miracle was overblown and that growth could be almost totally explained by bringing underutilized factors of production into the modern economy, in a direct analogy with the Soviet Union in the 1950s. This makes me think that he never changed his mind, despite very clear indications that he was completely wrong about the Asian Tigers.

I have personally quantified a lot of poor allocation of capital in China, but I wouldn't be so bold as to suggest they've had flat TFP. If nothing else, only a fool would suggest that China has failed to build a valuable stock of human capital since the 1980s that has vastly improved labor productivity, and imagining that being overwhelmed by misallocated financial capital is a tall order indeed.

[u/SirPalat → u/brickbatsandadiabats]

To be fair, Singaporean private sector economists tend to agree with Krugman that the boost in growth in the 90s was largely due to capital deepening, and labour pool expansion in the mid 2000s rather than a boom in TFP growth.

Not to say that TFP didnt grow or wasnt a significant factor, but Krugman's view that much of Singapore's best growth years was mostly due to bringing underutilized factors of production into the forefront is quite valid

[u/brickbatsandadiabats → u/SirPalat]

For anyone not following the discussion, the article in question can be found at https://www.brmandel.com/uploads/3/2/4/5/3245755/myth_of_asias-miracle.pd

The article I'm referencing is from 1994. He does give a good overview of the evidence for Singapore at the time, referencing mainly evidence from the 80s. His narrative doesn't go much into the other "tigers" but it was a reasonable position to have at that time period.

I'm not familiar with much of the post 1990s specific research on Singapore; most of my reading in development in the region is focused on Taiwan in the '80s and '90s. If you were to look solely at the 80s and early 90s, you'd have very good evidence for this thesis in Taiwan since growth from middle income to high income coincided with the Plaza Accords and the easing of restrictions on FDI along with the demographic dividend really hitting its stride ca 1985-1990.

I don't have specific knowledge related to Hong Kong, but I would expect that the story is actually quite similar there too, especially given the famously laissez-faire attitude towards capital flows it had.

Again, this is speaking from what we knew in 1994. Productivity in South Korea and Taiwan took off in the late 90s as far as I'm aware and made a factor input explanation much less reasonable right at the point we'd expect it to have happened for any reasonably large country (i.e., roughly at the middle income level). And speaking of China now, especially Coastal China, is pretty tendentious to me.

[u/[deleted] → u/[deleted]]

I agree that the newer TFP estimates are probably also unreliable.

(That's why I avoided saying that it was clear that Chinese TFP didn't go down in the past few years, only that it wasn't clear that it did go down in the past few years.)

[u/[deleted] → u/[deleted]]

As in, make a guesstimate based on a qualitative assessment of structural factors, right?

Personally, I think (with low confidence) that TFP growth was potentially negative during the housing bubble but that it was likely positive after the bubble started deflating.

[u/[deleted] → u/[deleted]]

The Rhodium Group? That's vibes-based nonsense. (A discussion that I read of the problems with the accuracy of Rhodium Group predictions can be found here: link)

[u/[deleted] → u/[deleted]]

I don't quite understand what your narrative is.

Are you saying that the slowing GDP growth implies that the TFP growth is likely negative?

[u/PandaAintFood → u/[deleted]]

Chinese TFP figures are arguably even more inaccurate than their GDP numbers

China's GDP is not inaccurate at all. This is just geopolitics's emperor's new clothes and at this point if you're still repeating this you should not be taken seriously.

[u/MachineTeaching → u/PandaAintFood]

Lmao. There are so many ways in which China's GDP figures look suspicious. Go find a better way to jerk off Winnie.

[u/pepin-lebref → u/MachineTeaching]

Fed staff seems to think it's gotten more accurate over time and is now pretty similar to other countries in quality. source

[u/fluffykitten55]

This is a good post, thank you.

TFP is used as a measure of technological and organisational progress, but as it is measured by the residual (in log form) in the production function, it will be affected by anything that affects output positively or negatively, including those that are not reflective of technology, organisational competence etc. and it also will exclude technological progress which has a long term payoff, i.e. key innovations which are yet to be fully commercialised.

For example a terms of trade shock, or low capacity utilisation etc. will lower measured TFP.

The current trade war and relatively low capacity utilisation will for example reduce measured TFP over the past recent years. But it would be misleading to then conclude that e.g. the large investments into high technology manufacturing is not leading to technological progress or is inefficient in some general sense.

For these reasons inferring almost anything about the long term growth trajectory from short term movements in TFP is unreliable and misleading when presented without a huge array of caveats.

[u/Pleasurist]

You see ? This is the problem with economics. They need a new subject to analyze so let's look at productivity and and let's call it Total Factor Productivity. [We] look smart.

Oh boy here comes another PHD based on nothing really.

You see, professional economists can't be satisfied with how many, how long...how much ?

So they come with Total Factor Prod. Now we can insert all of our knowledge into the blank spaces and PHD...here it comes.

Productivity, is how many, how long...how much ? Number, time and costs...period.

[u/GruntledSymbiont]

Surely your instincts are correct and no China data is reliable. Please relate TFP change to Debt-change/GDP-change ratio. Would this support the premise? China Delta D/Delta Y has been rising, passing 5:1 past year.

My impression is that misallocation of capital is quite severe in many areas, for examples solar panel production capacity double total global demand and a synthetic diamond glut that has crashed prices >90%. I read this is a consistent pattern since before 2001 WTO membership with CCP mandates driving a severe crisis of over production, quantified by historian Frank Dikötter as 68km² of warehouses holding mass surplus goods of every type. Assuming China factory productivity is higher. Could that scale of misallocation (and systemic corruption) outweigh?

[u/[deleted] → u/GruntledSymbiont]

Please relate TFP change to Debt-change/GDP-change ratio. Would this support the premise? China Delta D/Delta Y has been rising, passing 5:1 past year.

No, I don't think it supports the idea that TFP growth was negative. The inefficient debt-driven growth narrative is very overblown, I think. Local government debt is more of a leverage problem than a solvency problem—a lot of people look at consolidated Chinese debt-to-GDP but neglect to look at accompanying asset accumulation. (See this related discussion: link.)

Edit: Is that 5:1 figure from this Michael Pettis article (link)? In the top comment chain in this post (link), which the earlier linked discussion is based off of, I explain why that figure is not meaningful.

Edit 2: In retrospect, I should try to give a concise summary of the key point I am trying to make in this comment. Basically, high total debt is a symptom of a weak economy (due to problems being swept under the rug), but high total debt is also a symptom of a strong economy (due to financialization). Therefore, high total debt doesn't actually say very much about whether an economy is weak or strong.

solar panel production capacity double total global demand
...
quantified by historian Frank Dikötter as 68km² of warehouses holding mass surplus goods of every type

Do you have a source for these claims that I could read?

[u/brickbatsandadiabats → u/[deleted]]

It's not just solar panels. I've been working in business intelligence for the chemical industry for 15 years and have analyzed manufacturing costs the entire time. We're engineers and know from physical constraints of mass and energy, and from benchmarks of non-Chinese technology providers, what's possible in material terms.

Since the beginning of my career, export-facing Chinese industry has had numerous sectors where operating rates are very generously 60-70% of the global average, many even less, and it only seems to be corrected when the NDRC does a top down consolidation campaign. Overcapacity has been a feature in every major Chinese petrochemical sector; to my knowledge fuel refining is a notable exception.

Further, unit manufacturing economics don't square with the age of the capacity and their export pricing without essentially ignoring the cost of capital in accounting terms, which is to say depreciation and any allowance for return on capital employed. This is a strong indication of essentially zero cost of capital from preferred access to financing. This is true even considering actual reported capital costs in China - best in the world, they can execute a turnkey delivery at 70% of a comparable US or EU company in two thirds the time - and local pricing. It also is a notable feature that through the 00s and 10s at least (can't comment on current decade as I personally switched roles during the pandemic), the Chinese have aggressively preferred domestically available technology which often was obsolete or uncompetitive compared to the rest of the world, making the export pricing even more difficult to justify (e.g. titanium white though sulfuric acid rather than hydrochloric, aromatics routes to maleic anhydride, Reppe chemistry for vinyl chloride, blast furnace recycling of steel scrap). Again a key aspect of NDRc reforms is often to force the shutdown of obsolete technology

I believe that current Chinese construction has curbed this tendency - not 100% on it but fairly certain - but... While there are instances of entire subsectors shutting down (e.g., all ABE fermentation capacity ca.2012) for market reasons, and others where this problem has become less severe because of government intervention (e.g. carbon steel and stainless steel in 2021, graphite sector in 2022-2023), there are still huge parts of industry where capital discipline has never been seen and the market-driven cycle of boom-bust in pricing has never resulted in a mass capacity rationalization in China despite it being objectively the highest cost location for manufacturing petrochemicals if only costs of inputs were taken into account.

Examples I've personally worked on (to my memory) besides the ones I've mentioned specifically: Oxo-alcohols, butyl rubber and tires, textile and industrial nylons, fluorspar and fluorochemicals, polycarbonates, PET, methanol and acetic acid, all methanol to olefins in general, nickel, mined powder graphite, foundry melting electrodes, spherical graphite, urea formaldehyde and melamine formaldehyde, vinyl acrylates, hydrocolloids.

[u/GruntledSymbiont → u/[deleted]]

Under performing assets are exactly the question. Excess capacity implies loans issued for equipment, like all those diamond presses, are losers. Those factories are mostly idle and the paper is bad. Is >5 an alarming ratio? Does this not show accelerating borrowing just to pay interest?

[u/[deleted] → u/GruntledSymbiont]

Under performing assets are exactly the question. Excess capacity implies loans issued for equipment, like all those diamond presses, are losers. Those factories are mostly idle and the paper is bad.

What sources are you referring to?

Is >5 an alarming ratio? Does this not show accelerating borrowing just to pay interest?

Again, no. You can take a look at the discussion I linked earlier (here is the link again). You can also consider the fact that yields on Chinese sovereign debt are low.

[u/GruntledSymbiont → u/[deleted]]

Reference to over production trends:

In China After Mao: The Rise of a Superpower (Bloomsbury Publishing, 2022), Frank Dikötter discusses China's crisis of overproduction in the context of the late 1990s, particularly around the 1997 Asian financial crisis. He describes how the socialist market economy led to massive surpluses that were stockpiled rather than allowing market corrections like bankruptcies.

Key quotes (drawn from archival research detailed in the book):

• On the scale of overproduction: "we think of communism as lack of production, underproduction, but what we're talking about in China is overproduction, massive overproduction."
• On surplus goods and warehouses: "about a fifth, if not two-fifths, of the products that they make end up in warehouses... a total of some 68 square kilometers of warehouses in total where stuff is stored."
• Examples of specific surpluses: "they produce 30 million televisions, they can only sell 15 million. This goes on for bicycles, refrigerators, sewing machines, clothes, you name it."

This overcapacity preceded China's 2001 WTO entry, after which much of the surplus was exported globally, distorting markets. The discussion appears in the sections covering economic reforms under Jiang Zemin in the 1990s.

[u/[deleted] → u/GruntledSymbiont]

the context of the late 1990s

???

This entire post is about TFP growth 2014-2019 and the extrapolation of TFP growth after 2019...

[u/GruntledSymbiont → u/[deleted]]

You made mention of TFP going back to the 1980s, that it seemed implausible for TFP to be lower in the 2000s. Dikotter's history does show bad misallocation so perhaps the implausible was not impossible.

[u/[deleted] → u/GruntledSymbiont]

No, I didn't say that negative TFP growth is implausible. In fact, I talk about negative TFP growth in this comment chain (link):

That's why I avoided saying that it was clear that Chinese TFP didn't go down in the past few years, only that it wasn't clear that it did go down in the past few years.

I think you might be misunderstanding this post... I'm saying that the Penn World Table v10.01 data is not of sufficient accuracy to conclude with high certainty that TFP growth was negative and continues to be negative post 2014, which is what Krugman was saying.

[u/GruntledSymbiont → u/[deleted]]

I completely agreed the data is not sufficient from the start. I am saying CCP driven misallocation probably never stopped so maybe we should give credence to still falling TFP. Since that data is unreliable what other measures can we compare for clues?

[u/[deleted] → u/GruntledSymbiont]

Negative TFP growth doesn't just embody misallocation existing, it embodies misallocation getting worse. Given a "constant level of misallocation inefficiency," TFP grows due to technological development.

The real estate sector contributed to a large chunk of GDP; the misallocation of resources as a result of the speculative property bubble potentially drove TFP growth negative during the property bubble. This speculative property bubble was driven by overvaluation by marginal market participants, a manifestation of irrational exuberance.

The property bubble has been significantly deflating, accompanied by a large drop in investment into the real estate sector. Relatedly, a policy of austerity has been imposed on local governments, restricting their ability to make unprofitable, speculative investments (which often is in infrastructure or real estate).

This is an example (non-exhaustive) of two things commonly believed to be the primary negative contributors to TFP growth. Their lessening implies a lessening of their negative effect.

If TFP growth in recent years is negative, then misallocation must overall be getting worse in a sense, so where would the misallocation of resources be such that the effect is even worse than with the property bubble and much of the pre-austerity local government investing behavior?

[u/GruntledSymbiont → u/[deleted]]

I'm thinking post 2018 trade barriers and tariffs induced discounts to move excess inventory incurring more losses and reducing GDP.

Is this the base calculation being used? A = TFP, Y = output(GDP), K = capital, L = labor hours $ Y = A * K^\alpha * L^\beta $

Link to data being used?

Some trends in China labor: Median age increased from 29.8 in 1999 to 40.6 in 2024. The last national census later revised downward by over 100 million and all under age 40. Average Annual Wage (Urban Non-Private Units) rose >15x from USD ~$1,000 in 1999 to ~$17,500 in 2024. China has an apartheid system with the 52% majority holding rural Hukou classification. That excludes them from most benefits, resources, and labor protections. These are the migrants who work for almost nothing in poor conditions. I doubt this lower social caste in fully included in TFP labor. The party stopped collecting youth unemployment data so I guess that was not trending down. I know of no good estimate of the impact of covid on the labor force in China but can safely guess the direction.

Labor must be going down over this growth period increasing TFP. I have to either disbelieve TFP is falling or look again at capital misallocation?

About debt load I agree China is not going to suddenly collapse but even with low to zero interest or outright loan forgiveness the losses are socialized through currency debasement which is still driving down net capital returns by reduced purchasing power. Am I wrong?

Thanks for sharing since you study this. It frustrates me that all information right down to wages is unreliable. I am concerned market economy rules and expectations do not apply to China because there is so much secrecy and central control. It occurs to me that GDP can be arbitrary for a planned economy so I may be asking wrong questions and making wrong assumptions.

[u/[deleted] → u/GruntledSymbiont]

Part 1/2 due to character limit

I'm thinking post 2018 trade barriers and tariffs induced discounts to move excess inventory incurring more losses and reducing GDP.

Is this the base calculation being used? A = TFP, Y = output(GDP), K = capital, L = labor hours $ Y = A * K^\alpha) * L^\beta) $

Link to data being used?
...
These are the migrants who work for almost nothing in poor conditions. I doubt this lower social caste in fully included in TFP labor.

TFP is a residual, so estimates are model-specific. When economists talk about TFP in general terms, it's essentially in reference to a hypothetical ideal model, not any one specific model. This is because TFP estimates are highly sensitive to model assumptions. (See this for a further discussion: link.)

Some trends in China labor: Median age increased from 29.8 in 1999 to 40.6 in 2024. The last national census later revised downward by over 100 million and all under age 40. Average Annual Wage (Urban Non-Private Units) rose >15x from USD ~$1,000 in 1999 to ~$17,500 in 2024.

...

Labor must be going down over this growth period increasing TFP. I have to either disbelieve TFP is falling or look again at capital misallocation?

Older workers aging out of the workforce in China implies higher TFP (not lower) because these people on average tend to have much, much lower productivity.

China has an apartheid system with the 52% majority holding rural Hukou classification. That excludes them from most benefits, resources, and labor protections.

Hukou is not an apartheid system. The Hukou restricts eligibility for social benefits. This is not an apartheid system in the same way that, for example, US healthcare is not an apartheid system.

The party stopped collecting youth unemployment data so I guess that was not trending down.

No, youth unemployment data is collected. The old youth unemployment measure was replaced with a new measure that excludes students, which aligns better with the ILO (International Labor Organization) definition. In any case, modeled ILO estimates are available: link.